Glencoe Accounting: First Year Course, Student Edition

interactive student edition

TABLE OF CONTENTS Unit 1 Chapter 1

Introduction to Accounting You and the World of Accounting

2 4

Thinking About a Career: National Geographic Society

Chapter 2

Section 1 Exploring Careers Assessment

6 12

Section 2 Accounting Careers: The Possibilities Are Endless! Assessment

13 16

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Chapter Problems Winning Competitive Events Real-World Applications and Connections

17 18 20 21 23 24

The World of Business and Accounting

26

Becoming an Entrepreneur: Aveda Corporation Section 1 Exploring the World of Business Assessment

28 32

Section 2 Accounting: The Universal Language of Business Assessment

33 36

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Chapter Problems Winning Competitive Events Real-World Applications and Connections

37 38 40 41 43 44

vii

i-xxvii-FM-868829.indd vii

9/20/05 2:37:53 PM

TABLE OF CONTENTS Unit 2 Chapter 3

The Basic Accounting Cycle Business Transactions and the Accounting Equation

46 48

Investing Capital: HARPO Productions, Inc.

Chapter 4

Section 1 Property and Financial Claims Assessment

50 53

Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit Assessment

54 59

Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner Assessment

63

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

64 66 67 68 73 74

Transactions That Affect Assets, Liabilities, and Owner’s Capital

76

60

Analyzing Business Transactions: Panda Restaurant Group Section 1 Accounts and the Double-Entry Accounting System Assessment

78 82

Section 2 Applying the Rules of Debit and Credit Assessment

83 88

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

89 90 92 93 94 99 100

viii

i-xxvii-FM-868829.indd viii

9/20/05 2:37:55 PM

TABLE OF CONTENTS Chapter 5

Transactions That Affect Revenue, Expenses, and Withdrawals

102

Analyzing Revenue and Expenses: Southwest Airlines Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity Assessment

Chapter 6

104 110

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions Assessment

116

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

117 118 120 121 122 127 128

Recording Transactions in a General Journal

111

130

Recording Financial Information: Google Inc. Section 1 The Accounting Cycle Assessment

132 135

Section 2 Recording Transactions in the General Journal Assessment

136 149

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

150 152 153 154 159 160

ix

i-xxvii-FM-868829.indd ix

4/6/06 5:23:54 PM

TABLE OF CONTENTS Chapter 7

Posting Journal Entries to General Ledger Accounts

162

Accounts and the General Ledger: Los Angeles Angels of Anaheim

Los Angeles Angels of Anaheim

yo C a n n.com WEB SITES

Chapter 8

Section 1 The General Ledger Assessment

164 167

Section 2 The Posting Process Assessment

168 175

Accounting Careers in Focus Section 3 Preparing a Trial Balance Assessment

176 177 181

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

182 184 185 186 189 190

Mini Practice Set 1 Canyon.com Web Sites

192

Setting Up Accounting Records for a Sole Proprietorship

The Six-Column Work Sheet

194

Summarizing Results: American Express Company Section 1 Preparing the Work Sheet Assessment

196 200

Section 2 Completing the Work Sheet Assessment

201 207

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

208 210 211 212 215 216

x

i-xxvii-FM-868829.indd x

4/6/06 5:23:57 PM

TABLE OF CONTENTS Chapter 9

Financial Statements for a Sole Proprietorship

218

Preparing Financial Statements: Tapatío Hot Sauce Company

Chapter 10

Section 1 The Income Statement Assessment

220 224

Section 2 The Statement of Changes in Owner’s Equity Assessment

225 229

Accounting Careers in Focus

230

Section 3 The Balance Sheet and the Statement of Cash Flows Assessment

231 237

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

238 240 241 242 245 246

Completing the Accounting Cycle for a Sole Proprietorship

248

Looking at Fiscal Year-End Activities: Radio Flyer Section 1 Preparing Closing Entries Assessment

250 259

Section 2 Posting Closing Entries and Preparing a PostClosing Trial Balance Assessment

260 263

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

264 266 267 268 273 274

xi

i-xxvii-FM-868829.indd xi

4/6/06 5:24:02 PM

TABLE OF CONTENTS Chapter 11

Cash Control and Banking Activities

276

Controlling Cash: Jamba Juice

TUTORI NG SERVICE

Unit 3 Chapter 12

Section 1 Banking Procedures Assessment

278 283

Section 2 Reconciling the Bank Statement Assessment

284 292

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

293 294 296 297 298 301 302

Mini Practice Set 2 Fast Track Tutoring Service

304

Completing the Accounting Cycle for a Sole Proprietorship

Accounting for a Payroll System Payroll Accounting

306 308

Moving Into the Workforce: Symantec Corporation

Symantec Corporation

Section 1 Calculating Gross Earnings Assessment

310 314

Section 2 Payroll Deductions Assessment

315 319

Section 3 Payroll Records Assessment

320 325

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

326 328 329 330 335 336

xii

i-xxvii-FM-868829.indd xii

4/6/06 5:24:05 PM

TABLE OF CONTENTS Chapter 13

Payroll Liabilities and Tax Records

338

Evaluating Payroll Costs: Verizon Wireless 340 345

Section 2 Employer’s Payroll Taxes Assessment

346 350

Section 3 Tax Liability Payments and Tax Reports Assessment

351 360

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

361 362 364 365 366 369 370

Mini Practice Set 3 Green Thumb Plant Service

The Plant Service

Unit 4

Section 1 Journalizing and Posting the Payroll Assessment

372

Payroll Accounting

The Accounting Cycle for a Merchandising Corporation

Chapter 14

Accounting for Sales and Cash Receipts

376 378

Analyzing Sales: Underground Station

Underground Station

Section 1 Accounting for a Merchandising Business Assessment

380 383

Section 2 Analyzing Sales Transactions Assessment

384 392

Section 3 Analyzing Cash Receipt Transactions Assessment

393 401

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

402 404 405 406 411 412 xiii

i-xxvii-FM-868829.indd xiii

4/6/06 5:24:07 PM

TABLE OF CONTENTS Chapter 15

Accounting for Purchases and Cash Payments

414

Analyzing Purchases: Suncoast Motion Picture Company

Chapter 16

Section 1 Purchasing Items Needed by a Business Assessment

416 420

Section 2 Analyzing and Recording Purchases on Account Assessment

421 427

Accounting Careers in Focus

428

Section 3 Analyzing and Recording Cash Payments Assessment

429 435

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

436 438 439 440 445 446

Special Journals: Sales and Cash Receipts

448

Analyzing Sales Growth: The Sharper Image Section 1 The Sales Journal Assessment

450 458

Section 2 The Cash Receipts Journal Assessment

459 469

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

470 472 473 474 477 478

xiv

i-xxvii-FM-868829.indd xiv

9/20/05 2:38:30 PM

TABLE OF CONTENTS Chapter 17

Special Journals: Purchases and Cash Payments

480

Looking at the Role of Purchases: Adler Planetarium & Astronomy Museum Section 1 The Purchases Journal Assessment

482 488

Adler Planetarium & Astronomy Museum

Section 2 The Cash Payments Journal Assessment

489 502

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

503 504 506 507 508 513 514

Chapter 18

Adjustments and the Ten-Column Work Sheet

516

Analyzing Adjustments: Plantronics, Inc. Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory Assessment Plantronics, Inc.

Section 2 Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Assessment

518 523 524 528

Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Assessment

537

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

538 540 541 542 547 548

529

xv

i-xxvii-FM-868829.indd xv

4/6/06 5:24:10 PM

TABLE OF CONTENTS Chapter 19

Financial Statements for a Corporation

550

Analyzing Corporate Financial Statements: 99 Cents Only Stores

IN-TOUCH

Electronics

Chapter 20

Section 1 The Ownership of a Corporation Assessment

552 556

Section 2 The Income Statement Assessment

557 564

Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Assessment

565 571

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

572 574 575 576 579 580

Mini Practice Set 4 In-Touch Electronics

582

Recording Business Transactions in Special Journals

Completing the Accounting Cycle for a Merchandising Corporation

586

Closing the Books: PETsMART Section 1 Journalizing Closing Entries Assessment

588 592

Section 2 Posting Closing Entries Assessment

593 599

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

600 602 603 604 609 610

xvi

i-xxvii-FM-868829.indd xvi

9/20/05 2:39:10 PM

TABLE OF CONTENTS Chapter 21

Accounting for Publicly Held Corporations

612

Analyzing Corporate Stock: Hewlett-Packard

Unit 5 Chapter 22

Section 1 Publicly Held Corporations Assessment

614 618

Section 2 Distribution of Corporate Earnings Assessment

619 622

Accounting Careers in Focus

623

Section 3 Financial Reporting for a Publicly Held Corporation Assessment

624 627

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

628 630 631 632 635 636

Accounting for Special Procedures Cash Funds

638 640

Protecting Cash: Applebee’s International Section 1 The Change Fund Assessment

642 646

Section 2 The Petty Cash Fund Assessment

647 655

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

656 658 659 660 665 666

xvii

i-xxvii-FM-868829.indd xvii

4/6/06 5:24:27 PM

TABLE OF CONTENTS Chapter 23

Plant Assets and Depreciation

668

Depreciating Assets: Rush Trucking

Chapter 24

Section 1 Plant Assets and Equipment Assessment

670 673

Section 2 Calculating Depreciation Assessment

674 676

Section 3 Accounting for Depreciation Expense at the End of a Year Assessment

677 684

Accounting Careers in Focus Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

685 686 688 689 690 693 694

Uncollectible Accounts Receivable

696

Analyzing Credit Losses: U.S. Government Accountability Office Section 1 The Direct Write-Off Method Assessment

698 702

Section 2 The Allowance Method Assessment

703 711

Section 3 Estimating Uncollectible Accounts Receivable Assessment

712 715

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

716 718 719 720 723 724

xviii

i-xxvii-FM-868829.indd xviii

9/20/05 2:39:14 PM

TABLE OF CONTENTS Chapter 25

Inventories

726

Tracking Inventories: REI, Inc.

Chapter 26

Section 1 Determining the Quantity of Inventories Assessment

728 730

Section 2 Determining the Cost of Inventories Assessment

731 735

Accounting Careers in Focus

736

Section 3 Choosing an Inventory Costing Method Assessment

737 739

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

740 742 743 744 747 748

Notes Payable and Receivable

750

Evaluating Notes: Advanced Micro Devices

K I T E LOFT INC.

Section 1 Promissory Notes Assessment

752 756

Section 2 Notes Payable Assessment

757 764

Section 3 Notes Receivable Assessment

765 767

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

768 770 771 772 775 776

Mini Practice Set 5 Kite Loft Inc.

778

Completing the Accounting Cycle for a Merchandising Corporation

xix

i-xxvii-FM-868829.indd xix

9/20/05 2:39:16 PM

TABLE OF CONTENTS Unit 6 Chapter 27

Additional Accounting Topics Introduction to Partnerships

782 784

Looking at Partnerships: Moss Adams LLP

Chapter 28

Section 1 Partnership Characteristics and Partners’ Equity Assessment

786 789

Section 2 Division of Income and Loss Assessment

790 795

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

796 798 799 800 803 804

Financial Statements and Liquidation of a Partnership 806 Evaluating Partnership Financial Statements: King & King, Architects

Fine Finishes

Section 1 Financial Statements for a Partnership Assessment

808 810

Section 2 Liquidation of a Partnership Assessment

811 815

Chapter Summary Chapter Review and Activities Computerized Accounting Chapter Problems Winning Competitive Events Real-World Applications and Connections

816 818 819 820 823 824

Mini Practice Set 6 Fine Finishes

826

Completing the Accounting Cycle for a Partnership

xx

i-xxvii-FM-868829.indd xx

9/20/05 2:39:20 PM

TABLE OF CONTENTS Chapter 29

Ethics in Accounting

830

Assuring Responsible Governance: The Institute of Internal Auditors Section 1 The Nature of Ethics Assessment

832 835

Section 2 Ethics in the Accounting Profession Assessment

836 839

Chapter Summary Chapter Review and Activities Chapter Problems Real-World Applications and Connections

840 842 843 845

Appendix A

Adjustments for a Service Business Using a Ten-Column Work Sheet

A–2

Appendix B

Using the Numeric Keypad

A–14

Appendix C

Recording Transactions in the Combination Journal

A–18

Appendix D

The Accrual Basis of Accounting

A–26

Appendix E

Federal Personal Income Tax

A–36

Appendix F

Excerpts from the PETsMART, Inc. 2003 Annual Report

A–42

Appendix G

Additional Reinforcement Problems

A–52

Appendix H

Answers to Section Assessment Problems

A–70

Glossary

G–1

Index A

I–1

Index B

Real-World Applications and Connections

I–11

xxi

i-xxvii-FM-868829.indd xxi

9/20/05 2:39:23 PM

First-Year Course

GLENCOE

Donald J. Guerrieri Norwin High School, Retired North Huntingdon, Pennsylvania

New York, New York

i-xxvii-FM-868829.indd i

F. Barry Haber

Fayetteville State University, Retired Fayetteville, North Carolina

Columbus, Ohio

William B. Hoyt

Wilton High School Wilton, Connecticut

Chicago, Illinois

Peoria, Illinois

Robert E. Turner Northwestern State University Natchitoches, Louisiana

Woodland Hills, California

9/29/05 6:05:12 PM

Notice. Information on featured companies, organizations, and their products and services is included for educational purposes only and does not present or imply endorsement of the Glencoe Accounting program. Permission to use all business logos has been granted by the businesses represented in this text.

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher. Printed in the United States of America. Send all inquiries to: Glencoe/McGraw-Hill 21600 Oxnard Street, Suite 500 Woodland Hills, CA 91367 ISBN-13: 978-0-07-868829-4 ISBN-10: 0-07-868829-9

(Student Edition) (Student Edition)

ISBN-13: 978-0-07-873985-9 ISBN-10: 0-07-873985-3

(Teacher Wraparound Edition) (Teacher Wraparound Edition)

2 3 4 5 6 7 8 9 079 10 09 08 07 06

i-xxvii-FM-868829.indd ii

4/6/06 5:23:48 PM

Meet Our Authors Donald J. Guerrieri Donald J. Guerrieri has taught accounting at both the secondary and college levels. His work for a firm of certified public accountants gave him handson experience in working with real-world clients. Dr. Guerrieri has written numerous articles about teaching accounting for a number of educational journals. Now retired from his position as Accounting Instructor at Norwin High School, North Huntingdon, Pennsylvania, he is a program speaker at business education seminars and conferences.

William B. Hoyt William B. Hoyt is an Accounting Instructor at Wilton High School, Wilton, Connecticut. He has been a force in accounting curriculum development for many years and served as a member of the writing task force for the National Standards for Business Education. The author of various articles in professional journals, Mr. Hoyt was named Connecticut’s Outstanding Business Educator of the Year in 1996, and in 1997 the National Business Education Association named him National Secondary Teacher of the Year.

F. Barry Haber F. Barry Haber has taught accounting principles courses to literally thousands of students for more than 40 years. Dr. Haber is a certified public accountant and has served on the Minority Doctoral Fellows Committee of the American Institute of Certified Public Accountants (AICPA). In addition to teaching accounting principles, Dr. Haber has authored three other textbooks in addition to a number of articles and accounting cases. He is retired from his position as Professor of Accounting at Fayetteville State University, Fayetteville, North Carolina.

Robert E. Turner Robert E. Turner is an Assistant Professor in the College of Business at Northwestern State University, Natchitoches, Louisiana. Previously, he served as Vice President for Business Affairs at McNeese State University, Lake Charles, Louisiana, and at the University of Louisiana at Monroe. Mr. Turner’s broad experience includes teaching accounting and other business subjects at the high school and college levels. He is a frequent speaker at educational conferences, seminars, and workshops around the country.

Introducing Glencoe’s Business Partners

Standard & Poor’s is the world’s leading provider of independent investment research, indexes, and ratings. Financial decision makers around the world use S&P’s widely recognized investment data and analysis to help create growth and manage wealth. Among its many products are the S&P 1200, the premier global equity performance benchmark; the S&P 500, the premier U.S. portfolio index; and credit ratings on more than 220,000 securities and funds worldwide.

BusinessWeek is the leading global resource of groundbreaking news and analysis in a fast-changing business world. Across print, television, and on-line media, BusinessWeek offers essential insight that provides a competitive edge. BusinessWeek is the world’s most widely read business magazine, with more than 8 million readers, including online and television viewers.

Peachtree is a line of home, education, and business application software with emphasis on accounting products. Having sold more than a million packages of its software, Peachtree is recognized as a leader in the small business accounting market.

Robert Half International Inc. is the world’s first and largest staffing service specializing in accounting, finance, banking, and technology systems. With more than 300 offices internationally, Robert Half provides services for both full-time and temporary professionals.

The American Institute of Certified Public Accountants is a national professional organization for Certified Public Accountants in the United States. With more than 200,000 members, the AICPA provides resources and information to its members, enabling them to provide valuable services to employers, clients, and the public.

iii

i-xxvii-FM-868829.indd iii

9/20/05 2:37:49 PM

Contributing Editors Cynthia A. Ash

Patrick C. Hale

Alice Sineath

Louann Cummings

Sandra S. Lang

Kimberly D. Smith

Davenport University Granger, Indiana The University of Findlay Findlay, Ohio

Angelina College Lufkin, Texas

McKendree College Lebanon, Illinois

Forsyth Technical Community College Winston-Salem, North Carolina County College of Morris Randolph, New Jersey

Educational Reviewers Jayne Abernathy

Patricia Kay Fordham

Jeff Noyes

Barbara A. Berg

Patsy A. Frost

Karen Poidomani

Sibyl Cole-Olfzewski

Ruby Garr

Martha Ramirez

Naomi Crane

Karen King Gilliland

William Sinai

Johnsie Crawford

Norma C. Isassi

Computerized Accounting Dept. Chair West Valley Occupational Center Woodland Hills, California

Karen LaClair

Business Department Chair MacArthur High School San Antonio, Texas

Chris Mendez

Accounting Teacher Hueneme High School Oxnard, California

Regena Morris

Accounting Teacher Centerville High School Centerville, Ohio

Accounting Teacher Centerville High School Centerville, Ohio Vocational Business Teacher Carey High School Carey, Idaho Computer Tech. Teacher Medina High School Medina, Ohio Accounting Teacher Southwest High School Fort Worth, Texas Accounting Teacher Brandon High School Brandon, Florida

Carrie Davis

Business Teacher Yoncalla High School Yoncalla, Oregon

Melinda G. Dibenedetto Business Department Chair Shades Valley High School Birmingham, Alabama

Christine Fink

Business Teacher Cocalico High School Denver, Pennsylvania

Business Teacher Central High School Salt Lake City, Utah

Business Department Chair Scituate High School North Scituate, Rhode Island Business Department Head I.H. Kempner High School Sugar Land, Texas Business Department Chair Winchester Community High School Winchester, Indiana Accounting Teacher H.M. King High School Kingsville, Texas Business Department Chair Simsbury High School Simsbury, Connecticut Accounting Teacher Bel Air High School El Paso, Texas Business Education Teacher Arlington Heights High School Fort Worth, Texas

Business Education Teacher Minnetonka High School Minnetonka, Minnesota Business Teacher William Floyd High School Mastic Beach, New York Business Teacher McCallum High School Austin, Texas

Violet Snell

Alfonso Vargas

Karen Wood

Dianne L. Young Dean of Students Wilmington High School Wilmington, Delaware

iv

i-xxvii-FM-868829.indd iv

9/20/05 2:37:50 PM

Educational Consultants We wish to acknowledge the contributions of the following: Jayne Abernathy, Xenia, OH Jim Adams, New Albany, IN G. Armstrong, Bath, NY Ron Baldini, Pulaski, WI Alan Balog, Ravenna, OH B. A. Banks-Burke, Hudson, OH Denise M. Barbaris, West Milford, NJ E. Patricia Barnes, Evansville, IN Lou Ellen Bass, Four Oaks, NC Linda Becker, Cary, NC Perry Beckerman, Brooklyn, NY Kathleen Beetar, Houston, TX Scott Behnke, Wales, WI Len C. Bigler, Grand Rapids, MI Jackie Billings, McAllen, TX Lee Birnbaum, Farmingdale, NJ Cheryl Birx, Canandaigua, NY Linda J. Black, Mt. Airy, GA Elbert F. Black, Hastings, MI Cindi Blansfield, Auburn, WA Josephine Bliss, Merced, CA D. Bogataj, Flat Rock, MI Kelly Brock, Columbus, GA William A. Brogdon, German Town, TN Rachelle Brown, Morocco, IN Jessie Broxmeyer, Long Beach, NY Margaret Broyles, Forest Park, OH Gus Buchttolz, Wyoming, MI Ronda K. Budd, Grove City, OH Pete Bush, Leesburg, FL Michelle Cardoza, Tulare, CA Walter Carlson, Torrance, CA Marisa Charles, Houston, TX Bill Christianson, Spokane, WA Jodi S. Clark, Warner Robins, GA Anthony Paul Corbisiero, West New York, NJ Ron Craig, Anaheim, CA Lynn Crawford, Cudahy, WI Claudia Cullari, Fair Lawn, NJ Jo Damron, Abilene, TX Jan Davis, Port Neches, TX Toni DeFuria, Old Tappan, NJ Denise Deltondo, Girard, OH Carolyn Deshler, Moorpark, CA Diane DeWitt, Freeport, IL Wanda Drake, Jackson, TN Buzz Drake, Barrington, IL Ray Dunavant, Denison, TX Tearle Dwiggins, Pendleton, IN

Susan España, Rocklin, CA Morris P. Fair, Sr., Jackson, TN Glenn Fong, Sacramento, CA Julie Fox, Wisconsin Rapids, WI Carolyn Francis, Baytown, TX Cherilynn Frost, Livonia, MI Patricia T. Gardella, Vineland, NJ Robert D. Garrison, Belleview, FL Kimberly Morris Gehres, Adrian, MI JoAnn Gipson, Garland, TX Nancy Glavic, New Concord, OH Joyce Greemon, Gastonin, NC Sheree Green, Teaneck, NJ Andrea Gross, Vidor, TX Guzzeta, Plant City, FL Ronald L. Hainds, Jacksonville, IL Kellie Hair, Kennesaw, GA Sheryl J. Hane, Norco, CA Janice Hanes, Fort Worth, TX Marion Hanneld, Omaha, NE Farolyn Hanscom, Riverside, CA Wanda Harris, Eden, NC Tammy Hatfield, Tullahoma, TN Felicia S. Hatten, Detroit, MI Debra R. Hauser, Shrub Oak, NY Richard Heim, Latham, NY Audrey M. Hendry, Huntington Beach, CA John Hodgins, Marysville, WA Helen Hogan, Lithonia, GA Betty L. Holloway, Maplewood, NJ Carol Huprich, Dover, OH Antoinette Hutchings, Slate Hill, NY David Ifkovic, Wilton, CT Steve Ingmire, Indianapolis, IN Waydene C. Jackson, Stone Mountain, GA M. Jackson, Houston, TX Irma D. James, Dayton, OH Carol Jekel, Flushing, MI Lori Jepson, Montclair, CA Kay Jernigan, Vanceboro, NC Glenn Johnson, Mukwonago, WI Judy Jones, Amarillo, TX Mary K. Jones, Neenah, WI Ted Juske, Mundelein, IL Beverly Kaeser, Appleton, WI Linda Keats, Stevens Point, WI Sue Kelley, Hubbard, OH Mary Kay King, Dickson, TN Carol Kinney, Eau Claire, WI

v

i-xxvii-FM-868829.indd v

9/20/05 2:37:51 PM

Ann Klingelsmith, Greenville, MI Tammy Koch, Minocqua, WI Patrick Kubeny, Rhinelander, WI Cheryl M. Lagan, Ossining, NY Amelia Lard, Memphis, TN Marianna Larkin, Waxahachie, TX Becky Larsen, Irvine, CA Sharon Larson, Crystal Lake, IL Inez Lauerman, Shingle Springs, CA Annette Laughlin, Oswego, IL Steve Leighton, Brooklyn, NY James Leonard, Palos Hills, IL Sue Lewis, Littlerock, CA Stan Lewis, Champaign, IL Donna Lewis, Morehead City, NC Theresa Lueras, Daly City, CA Sherry Lund, Port Angeles, WA Linda Lupi, West Bloomfield, MI A. Mallette, New York, NY John Matera, Kenosha, WI Alice Matthews, Artesia, CA Sarah McBride, Hickory, NC Rebecca McKnight, Gainesville, FL Pam Meyer, The Woodlands, TX J. Miller, Madison, OH Gloria Morris, Fort Worth, TX Karen Mozingo, Greenville, NC Ralph A. Muro, Binghamton, NY Dianne Murphy, Rancho Cucamonga, CA Jill N. Murphy-Totten, Middletown, OH John Murray, Fraser, MI Karen Neuman, Parma, OH William Nitch, Niles, OH Bonnie N. Nute, Munford, TN Betty O’Dell, Escondido, CA Deborah Ottmers, San Antonio, TX Donna Owens, Missouri City, TX RaeNell Parker, Menomonie, WI Ronda Patrick, Kirkland, WA Diane Personett, Rushville, IN Hank Petite, Bloomfield, NJ Glenn Philpott, Belleville, IL Kip Pichel, Auburn Hills, MI Patti Pletcher, Bristol, IN Mark G. Pretz, Harlingen, TX Diane A. Prom, Oak Creek, WI Lydia Quinones, Dunwoody GA Mary C. Rabb, Winchester, TN Margaret Ralph, Portland, IN Glenda Razor, Santa Ana, CA

Tom Reach, Aliso Viejo, CA C. Redmond, Lakewood, CA Suzanne Reisert, Floral Park, NY Edlyn Reneau, Corpus Christi, TX Ruth Riley, Poland, OH Melanie Rodges, Keller, TX Rosalinda Rodriguez, McAllen, TX Mary R. Roth, Warner Robins, GA Frank Rudnesky, Pine Hill, NJ Joyce Sadd, Hastings, NE Lawrence Sakalas, Southgate, MI Gary L. Schepf, Irving, TX Donna M. Scheuerer, Farmingdale, NY Jerry Schlecher, Hartland, MI Sue Smith, Whittier, CA Pete Smith, Mishawaka, IN James Smith, Greensboro, NC Linda Songer, Orange Park, FL Linda Spellich, Belleville, MI Carolyn R. Spencer, East St. Louis, IL Camille Sroka, Toms River, NJ Will Stauske, Cedarburg, WI Beverly Stergeos, Fort Worth, TX Linda Stevens, Houston, TX Anne Stewart, Clearwater, FL Geoffrey Strauss, Endicott, NY Amy C. Strickland, Columbus, GA Debbie Stuebbe, Bakersfield, CA Ken Swiergosz, Toledo, OH Bonnie Toone, Evansville, IN Robert Torres, Anaheim, CA Jeff VanArsdel, West Lafayette, IN Jill Vicino, Darien, IL Lina Volesky, West Bend, WI Sandy Wainio, Durham, NC David D. Weaver, Palmdale, CA Irene Webb, Hackensack, NJ Kathy Webb, Garland, TX Gloria Wein, Aberdeen, NJ Victoria Wenke, Burlington, WI Donna Wheeler, Madison, IN Patricia Williams, Tampa, FL June Winkel, Plymouth, WI Ann Wittmer, Waco, TX Karen M. Wolf, West Carrollton, OH William W. Wunrow, Green Bay, WI Thomas F. YingLing, St. Marys, OH Carol Young, Yorba Linda, CA Cy Young, Garden Grove, CA Cheri Zuccarelli, Phelan, CA

vi

i-xxvii-FM-868829.indd vi

9/20/05 2:37:52 PM

To the Student

The Structure of This Book Your textbook contains 29 chapters that are logically organized in six units. Each chapter consists of two or three sections. This structure presents your accounting lessons clearly and simply. Your book also contains a wide variety of features to clarify the lessons and tie them to real-life situations.

Units UNIT 2

Each unit introduces a major aspect of accounting. The photo and features in the unit opener are organized around a common theme that indicates how people in the real world use accounting.

The Basic ycle Accounting C

WebQuest Internet Project introduces an Internet activity that you will perform throughout the unit. It sends you to the Glencoe Accounting Online Learning Center for instructions.

ject

Internet Pro Ball Game

A Whole New

However, in the popular sports. the world’s most money. Soccer is one of a history of losing ssional soccer has . In this project United States, profe U.S. fan base grows changing as the ssional sports. That situation is profe of side the business you will explore com and ounting.glencoe. Log on to glencoeacc Click on WebQuest and Center. click on Student by reading your WebQuest select Unit 2. Begin the Task.

on Continue working

your WebQuest

as you study Unit

Chapter Page

2.

11 3 6 9 10 303 75 161 247 275

RE THE BIG PICTU RS

MILLIONS OF DOLLA

ce Q & A Personal Finan about the

MANCHESTER NEW YORK

I need to know Q: Why do ? accounting cycle you will cts of your life, A: In all aspe ert economic events need to conv ion. rmat info l into usefu ple of useful exam an is Q: What information? rt showing how ple is a repo saved, and A: An exam you earned, much money n period. spent in a give

soccer h Premiership

UNITED, Englis

all League Baseb YANKEES, Major

JUVENTUS,

Italian Serie A

A.C. MILAN,

soccer

Italian Serie A

soccer

S, NFL

TON REDSKIN INGT HING ASH WAS

Standard & Poor’s Personal Finance Q & A helps you identify how accounting material presented in the unit relates to your life in the real world.

Data: Deloitte

ted from euros

*Revenues conver

BusinessWeek. by permission from ource: Reprinted Source

to dollars

The BusinessWeek feature presents “The Big Picture” that graphically illustrates WebQuest statistics to help them come alive.

THINK IT OVER in your life events occur can you What economic th period? How in a one-mon so that it is information organize that you? useful to

47

.com nting.glencoe glencoeaccou

46

Chapters Reading strategies throughout the chapter guide you before you read each chapter, as you read it, and after you have read it. They highlight the most important concepts in the chapter before you read. As you read, these strategies prompt you to identify how accounting concepts affect your daily life right now, recognize similarities and differences in concepts, recall previously introduced ideas and apply them to new material, identify key concepts, and restate concepts in your own words. After You Read strategies suggest activities to organize what you have learned. CHA PTE R 6

ns Recording Transactio l na ur Jo l ra in a Gene BEFORE YOU

What You’ll Learn Explain the first three steps the accounting cycle.

1.

in

2.

Give and describe several examples of source documents.

3.

Explain the purpose of journalizing.

4.

Apply information from source documents. Describe the steps to make a general journal entry.

5. 6. 7.

. Make general journal entries l Correct errors in genera journal entries.

8.

Define the accounting terms r. introduced in this chapte

Why It’s Important

▲

What You’ll Learn introduces the chapter topics. Why It’s Important sets the stage and shows how chapter materials are relevant to the business world. Exploring the Real World of Business spotlights a successful, well-known company to illustrate an accounting topic discussed in the chapter.

Every transaction you have with a business is documented in some way. ent Companies keep perman records of transactions.

READ

Predict

title tell you? 1. What does the chapter from personal experience? know about this subject 2. What do you already chapters? about this in the earlier 3. What have you learned dge of this subject? knowle your in exist 4. What gaps

ld of Business

Exploring the Real Wor RECORDING FINANCIAL

INFORMATION

Google Inc.

ation on the you look for inform Think about how often something you find is for school or just Internet, whether it is Google. chance your first stop good a is There interesting. at Stanford Brin were students Larry Page and Sergey the next few met in 1995. During University when they logy. They techno together on Web search years, they worked al computers do searches using person developed a way to nes. machi ive expens instead of big, a garage in 1998. e Inc. was started in The company Googl es a day. Within two about 10,000 search The site performed to 100 million. Today that number grew and one-half years, company takes et search engine. The Google is the top Intern year, keeping its team in advertising each in billions of dollars of accountants busy.

ou Think? What Do You

ny,, what types of g an Internet compa If you were just startin would you record? financial information

130

ing Transactions in Chapter 6 Record

d

Working in the Real Worl

KNOWLEDGE

al Connection

Person NTING is it important to keep 1. In your workplace, why journal of the things transactions? Have you ever kept a daily accurate records of daily day? The general in that happen during your l 2. List five business transactions that happen similar. The daily financia is business a of journal your workplace. A company like there. d recorde are happenings r compute in invests ing, Google sells advertis Online Connection engineers. You will coe.com and click equipment, and pays software Go to glencoeaccounting.glen transactions in a on Working in the learn how to record business on Student Center. Click Chapter 6. journal in this chapter. Real World and select

APPLYING YOUR ACCOU

Working in the Real World establishes a bridge between the chapter’s content and the real-world workplace.

131

lencoe.com glencoeaccounting.g

a General Journal

xxii

i-xxvii-FM-868829.indd xxii

9/20/05 2:39:24 PM

To the Student The Chapter Summary organizes the chapter’s key concepts to help you review the main ideas.

Summary

CH AP TER 6 Key Concepts

three below. The first cycle is pictured 1. The accounting e documents. and verify sourc Step 1: Collect n. each transactio Step 2: Analyze n. each transactio Step 3: Journalize

2

DEBIT

1

Post to the ledger

CH AP TE R 6

CREDIT ACCOUNT

RECEIPT

POST-CLOSING TRIAL BALANCE

GENERAL JOURNAL

ACCOUNT DEBIT

INVOICE

MEMORANDUM

Journalize each transaction

Analyze each transaction

Collect and verify source documents

d: steps are highlighte

LEDGER

3

CREDIT

4

AFTER YOU

5

9

8

2.

ments are 2. Source docu listed below.

Prepare a work sheet

BALANCE SHEET

LEDGER

Journalize and closing entries

a. List the first three steps of the accountin b. What woul g cycle. d happen if you skipped Step Source Documen 2? ts a. List four sourc e documents and describe b. Explain when the contents of each source docu each. 3. Journalizin ment is used. g a. Why is a journ al sometimes called the book b. What is the of original entry purpose of recor ? ding transactio 4. Applying Information ns in a journal? a. Where do you get the infor mation needed b. How do you to make a journ determine the al entry? debit and credi 5. Steps to Make a Gene t parts of a journ ral Journal Entry al entry? a. What six types of information are included in b. In what orde each general r do you recor journal entry? d this informati 6. Making Gene on? ral Journal Entri es a. How are the two amount colum ns of the gene b. Describe the spacing of ral journal used the information to record dolla 7. Correcting in the Descriptio r amounts? General Journ n column. al Errors a. What proce dure is used to correct a gene b. What are ral journal entry the possible cons error in a man equences of erasi ual syste m? ng an error in the general journ al?

WORK SHEET

INCOME STATEMENT

STATEMENT OF CHANGES IN OWNER'S EQUITY

Prepare a post-closing trial balance

post

Prepare a trial balance

Prepare financial statements

ess evidence of busin

e documents are examples of sourc transactions. Four

account g of an item on buying or sellin � describes the ess Invoice received by a busin business � describes cash place within a takes that Receipt n transactio nt balance checking accou � describes a and shows the Memorandum specific check � describes a ns in the order No. 110 Check Stub 250.00 ds of transactio -recor $ is keep 20 al to November 2 journals ns in a journ Date ding transactio 3. Businesses use recor Info-Systems of ss proce To fax/modem they occur. The For alizing g. Cents Dollars n needed for journ called journalizin the informatio in e conta sourc s a ment 25,000 00 forward n to the right is Balance brought 4. Source docu check stub show to make the Add deposits transactions. The mation is used highlighted infor document. The 25,000 00 Total journal entry. 250 00 Less this check

Balance carried

150

READ

Check Your Und erstanding 1. Accountin g Cycle

TRIAL BALANCE

6

7

GENERAL JOURNAL

forward

1. Select the problem set for Wilderness Rentals (Prob. 6–4). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions using the General Journal Entry option in the Tasks menu. 4. Print a General Journal report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 6–4 1. Restore the Problem 6-4.QBB file. 2. Enter all of the general journal transactions

using the Make General Journal Entries option in the Company menu. 3. Print a Journal report. 4. Proof your work and make any needed corrections. 5. Complete the Analyze activity. 6. Back up your work.

152

Problem 6–4 Recording General Journal Transactions Ronald Hicks owns and operates Wilderness Rentals. The following accounts are needed to journalize the month’s transactions. General Ledger 101 Cash in Bank 105 Accts. Rec.—Helen Katz 110 Accts. Rec.—Polk and Co. 120 Office Equipment 125 Camping Equipment 201 Accts. Pay.—Adventure Equipment Inc. 203 Accts. Pay.—Digital Tech Computers 205 Accts. Pay.—Greg Mollaro

order is called a. posting. b. journalizing. c. analyzing. d. processing. 2. Every journal consists of four parts: a. account title, date, post reference, amount. b. date, debit, credit, source document. c. date, page number, debit, credit. d. date, post reference, debit, credit. 3. The amount of each asset in an opening entry is recorded in a journal in the a. General Debit column. b. General Credit column. c. both a and b. d. neither a nor b. 4. An example of a business document that indicates a transaction has occurred is a. a journal. b. a ledger. c. a memo. d. a balance sheet.

journal

journalizing memorandum receipt source document

301 305 310 401 501 505 515 520 525

Ronald Hicks, Capital Ronald Hicks, Withdrawals Income Summary Equipment Rental Revenue Advertising Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense

Chapter 6 Revie w and Activities

Date

Jan.

glencoeaccounting.glencoe.com

Transactions

1 Wrote Check 310 for the part-time secretary’s salary, $270. 3 Bought $2,000 of camping equipment on account from Adventure Equipment Inc., Invoice 320. 5 Received $500 from a client for equipment rental, Receipt 150. 7 Wrote Check 311 to pay the electricity bill of $110. 11 Billed a client, Polk and Co., $1,700 for rental equipment, Sales Invoice 262. 12 Ronald Hicks withdrew $800 for personal use, Check 312. 14 Bought a $300 scanner for the office computer from Digital Tech Computers, on account, Invoice 270. 16 Wrote Check 313 for $1,000 as an installment payment toward the amount owed to Adventure Equipment Inc. 25 Received $1,700 from Polk and Co. in payment on their account, Receipt 151. 30 Paid Digital Tech Computers $300 for the amount owed, Check 314.

Business Professionals of America

MULTIPLE CHOICE 5. The source document used when a customer makes a payment on his/her account owed would be a a. sales invoice. b. check. c. receipt. d. memorandum.

Winning Competitive Events gives you the opportunity to practice your test-taking skills with questions provided by two national organizations, Future Business Leaders of America and Business Professionals of America.

Instructions: Record the following transactions on page 1 of the general journal in your working papers. For each transaction: 1. Enter the date. Use the current year. 2. Enter the name of the account debited. 3. Enter the amount of the debit. 4. Enter the name of the account credited. 5. Enter the amount of the credit. 6. Enter a source document reference.

Analyze 154

Future Business Leaders of America

The Chapter Problems provide exercises so you can actively apply what you have learned by performing actual accounting functions.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

CHAPTER 6

Calculate the amount of cash deducted from the Cash in Bank account in January.

Critical Thinking

Chapter 6 Problems

Real-World Applications and Connections

1. What term describes any accounting period of 12 months? 2. How is the general journal entry for a cash purchase different from the entry for a purchase on account? 3. It is your first day on a new job. Your task is to journalize transactions. You just sat at your desk, which is covered with papers. What do you do next? 4. Compare a general journal entry entr to a transaction recorded in T accounts. How is it similar? How is it different different? 5. What items do you need to complete each of the first three steps of the accounting cycle? Include office supplies and forms as well as any information that will be needed. 6. What is the value of keeping the record of business transactions in chronological order order?

Real-World Applications and Connections apply and extend C TUDY the chapter concepts to enrich STUD your accounting knowledge. They include critical thinking questions, case studies, and activities to develop skills in communicating ETHI accounting information, ethical CS decision making, financial statement analysis, personal finance, international accounting and more. ASE

a eerr mattttte of

Gossip in the W Workplace

Assume that you are an accounting clerk for a large insurance company like Farmers Insurance. Your boss introduces you to the newest hire, and you Sally. You remember recognize her as a former classmate from high school named Sally that Sally had been suspended from school for a series of locker thefts. During lunch you consider telling other co-workers about Sally’s history. You also wonder if your boss knows. ETHICAL DECISION MAKING 1. What are the ethical issues issues? 4. How do the alternatives affect the parties? 2. What are the alternatives alternatives? 3. Who are the affected parties parties?

160

)) Communicating

Chapter 6 Real-World Applications and Connections

5. What would you do?

• Concept Capsules and Terminology

Chapter 6 Winning Competitive Events

CHAPTER 6

Write a paragraph describing the content of invoices, check stubs, memorandums, and receipts. Explain how to verify and analyze these source documents before an entry in the journal is made.

Skills Beyond

Creative Thinking

NUMBERS

INTERNATIONAL

Accounting

159

Describing Source Documents

ACCOUNTING

Service Business: Exercise and Fitness

Elena Rodriguez started a business offering an exercise facility and personal physical training. Elena has hired you as a financial consultant to help her set up her accounting system. She has rented a space for her business, pur purchased several exercise machines, and hired a part-time exercise instructor. Elena’s clients can either pay a fee for each visit or purchase a membership. INSTRUCTIONS 1. W Write rite a plan for Elena Rodriguez explaining the types of financial information she needs to record. Describe the sour source documents that might be a part of her business. For example, should Elena send invoices to her non-membership clients or ask them to pay at each visit? Describe why it is important for Elena to record both the cost of doing business and the income from the business. 2. Suggest a chart of accounts for Elena’s Elena business.

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 6. • Practice Questions and Test-Taking Tips

Real-World Applications and Connections $ ))

General Journal Entries

CHAPTE R 6

MULTIPLE CHOICE 1. Recording account information in chronological

Problems

CHAPTER 6

SMART GUIDE

Winning Competitive Events

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Assume you are an accountant who keeps financial records for smal l businesses. Write a one-page newsletter that you might send to potential clients describin g the importance of accounting recor ds. Use each of the terms below in your newsletter. accounting cycle calendar year check stub fiscal year general journ al invoice

Step–by–Step Instructions: Problem 6–4

The Chapter Review and Activities test your understanding of the main points and key terms in the chapter.

Apply Key Ter ms

24,750 00

ary Chapter 6 Summ

Complete problems using:

Review and Ac tivities

Congratulations! You’ve been chosen as the local Business Owner of the Year! Write a one-page press release describing your business and why you’ve been successful. Be sure to include a brief description of your business, the skills you use in running a successful business, and how you plan to continue being successful in the future.

Dating Documents Source documents from different countries can have different date formats: United States Australia Date written out November 1, 2008 1 November 2008 Abbreviation 11/1/08 1/11/08 Format MM/D/YY D/MM/YY As you can see in this example, writing out the month prevents confusion. The International Organization for Standardization (ISO) promotes the worldwide use of a single format: YYYY-MM-DD. INSTRUCTIONS Write the date November 1, 2008, using the recommended international format.

Making It

Personal

Your Personal Finance Records Your day-to-day source documents are personal financial records. Personal financial records also include documents that are not related to everyday transactions. Vehicle titles, birth certificates, and tax returns are all personal financial documents. You can store your financial documents in home files, a home safe, or a safe-deposit box. You can also keep some financial records on a home computer. PERSONAL FINANCE ACTIVITY Imagine a person your age who drives to a part-time job and has a credit card. Make a list of the types of records Transactions in Sports and documents such a person would probably The general journal can be used have. Create a plan that describes which records to record all types of transactions. and documents to store and where to store Visit glencoeaccounting them. .glencoe.com and click on Student Center. Click on PERSONAL FINANCE ONLINE Log on to WebQuest and select Unit 2 to glencoeaccounting.glencoe.com and click continue your Internet project. on Student Center. Click on Making It Personal and select Chapter 6.

glencoeaccounting.glencoe.com

Chapter 6 Real-World Applications and Connections

161

xxiii

i-xxvii-FM-868829.indd 23

9/23/05 3:23:01 PM

To the Student Sections SECTION 1

BEFORE YOU

Each section opens with the Main Idea of the section; Read to Learn…, which lists the major topics and their page numbers; and Key Terms that you will learn in that section.

The Accounting Cycle

READ

In earlier chapters you learned to use the accoun ting equation and T accounts to analyz e business transactions . In this chapter you will learn how to record business transa ctions in a journal.

Main Idea

The Steps of the Acc ounting Cycle

The accounting cycle is a series of steps done in each accoun ting period to keep records in an orderly fashion.

What Is the Accou nting Cycle?

The accounting period of a business is separa ted into activities called the accou nting cycle . These activities help the business keep its accounting records in an orderl y fashion. Take a look at Figure 6–1, which describes accou nting activities and their sequence. In this chapter you will use Steps 1, 2, and 3 of the accounting cycle:

Read to Learn…

➤ the steps in the accounting

cycle. (p. 132) ➤ the different types of accoun ting periods. (p. 134)

Key Terms

accounting cycle check stub source document journal invoice journalizing receipt fiscal year memorandum calendar year

1. Collect and verify source documents. 2. Analyze each transa ction. 3. Journalize each transa ction. After studying Chapt ers 3 through 10, you will have covered the entire accounting cycle for a service busine ss organized as a sole proprietorship. Analyze each transaction

Collect and verify source documents

ACCOUNT

RECEIPT

NDUM 3

GENERAL JOURNAL

CREDIT

INVOICE

MEMORANDUM

Journalize each transaction

ACCOUNT DEBIT

2

DEBIT

1

3

CREDIT

Post to the ledger

4

LEDGER

MEMORA

Service Delivery RoadrunnerGateway Blvd.

Busin

ans e s s Tr

155 to, CA Sacramen

5 action

TO:

94230

POST-CLOSING TRIAL BALANCE

T

Y L ENTR

132

7 STATEMENT OF CHANGES IN OWNER'S EQUITY

LEDGER

BALANCE SHEET

Journalize and post closing entries

Chapter 6 Recording Transa ransact ctions ions in a

6

5 TRIAL BALANCE

WORK SHEET

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

General Journal

DEBIT

POST. REF.

2 0 0 00

mpany

Green Co ts. Rec.— t. 11 Acc ipment 14 Oc Office Equ dum 3 15 Memoran

Each Business Transaction model is a step-by-step process for you to use in analyzing activities that affect a business.

1

PAGE

JOURNAL

PTION DESCRI DATE

8

INCOME STATEMENT

Prepare a post-closing trial balance

Figure 6–1 Steps in the Accounting Cycle with Steps 1, 2, 3 Highlighted

Credit
200

Debit 

GENERAL

7.

JOURNA

GENERAL JOURNAL

uipme

Office Eq

e— Receivabl Accounts mpany Green Co Credit
Debit  200

6. TS ACCOUN

9

Clerk Accounting chez Maria San

FROM: 11, 20-e on October e DATE: e telephon $200. telephon pany for T: Sold r sold on m 3. en Com SUBJEC adrunne unt to Gre morandu e on acco er 11 Ro telephon $200, Me for On Octob y Sold one an een Comp Gr to nt accou accounts 1. The Accounts — Identify IS ble Receiva ANALYS mpany ee Gr n Co Equipe fice and Offic ected. $200. Of aff ounts. reased by are nt me asset acc Company is inc ounts are reen acc 2. Both ts Receivable—G $200. by fy un d ase Classi 3. Acco nt is decre
/ Equipme . y for $200 Compan —Green ceivable Re 00. Accounts nt for $2 bit me De uip 4. Office Eq RULE 5. Credit CREDIT nt DEBIT-

Figures aid your visual learning of key concepts, relationships, and accounting forms and documents.

CREDIT 14

2 0 0 00

15 16 17

16 17

$ Date

6

To

350.00 12 October re Auto North Sho k nt on truc installme

No. 102 -20

For t Dollars ction as the firs 00 2 for $350 22,000 tober 9. Check 10 forward to on Oc brought r mailed Balance Shore Au adrunne m North er 12 Ro fro tob d Oc ase osits ch On Add dep ck purch — tru ble ya the Pa on ent 00 Accounts sh in installm 22,000 accounts and Ca 1. The ore Auto Total 350 00 North Sh ected. Identify check aff IS 00 th Shore Less this 21,650 Bank are ANALYS ble—Nor ard in ya forw Pa sh ied ts Ca carr un Balance account. 2. Acco a liabilA ityFTER Auto is Classify YOU account. et ass by an ased Bank is are decre accounts 3. Both e Main Idea eral
/ Reinforce th $350. First Line of Gen141 rent types Business nall Entry Think of three diffe Jou Jourrna General Tran theon insacti transactions

Busin

ansa e s s Tr

Cents

Assessment

SECTION 2

READ

General Second Line of Journal Entry

The section Assessment helps you reinforce the section’s main idea by creating a visual organizer. After You Read helps you organize materials you learned in the section. A Do the Math activity sharpens your math skills. Problems check your understanding of the materials introduced. Answers to section assesment problems are provided in Appendix H.

eral Third Line of Gen Journal Entry

ons of business Transacti theg next indin Recor ht have mig n2 youtio Sec e similar

month. Use a tabl ribe the to this one to desc for entry general journal each transaction.

World. The from Tech a on account percent for puter system price by 20 bought a com ion. reduced the Com this transact Tech World for but ry 00, ent l Hania Dance $3,0 rna em is about the jou ns e for the syst stio pric que lar regu following . Answer the t amount? storewide sale and for wha unt is debited t amount? 1. Which acco and for wha unt is credited 2. Which acco

Do the Math pany

nsactions l are Business Tra general journa 2 Recording g a business transaction in theof paper, indicate the Problem 6– et rdin steps for reco on a blank she ers or The six r working pap Instructions order. In you w, out of shown belo s. of these step proper order of the credit t oun A. Am unt credited acco the of B. Name ce ument referen C. Source doc

transaction D. Date of the of the debit E. Amount debited the account F. Name of

Transactionss the following accounts. use 3 Analyzing Problem 6– ntly started a day-care center. She n rece Glenda Hoh

n, Capital Glenda Hoh ls n, Withdrawa Glenda Hoh s Day-Care Fee ense Utilities Exp e Van Expens transaction: er, for each e sheet of pap whether the on a separat . Determine g papers or kin which wor r each account In you is debited and cted. Classify unt affe Instructions acco are s ch unt Indicate whi which acco Determine or decreased. g increased bein are s account ited. account is cred ger General Led k Cash in Ban sery iny Tots Nur Accts. Rec.—T niture Fur Office Van er Passeng Bus Service cme .—A Accts. Pay

Transactions:

for cash. passenger van . 1. Bought a for the month . telephone bill -care services 2. Paid the tomers for day cash from cus 3. Received

sactions Recording Tran Section 2

Journal in the General

149

xxiv

i-xxvii-FM-868829.indd xxiv

9/20/05 2:41:31 PM

To the Student Features Connect to…

LANGUAGE ARTS

The Connect to… feature links accounting concepts to other subjects, such as history, science, and language arts.

In accounting capital refers to money used to start up or grow a new business. The term comes from the Latin word for head—caput. In ancient times nomadic herdsmen measured their wealth by the number of animals they had. They got this number by counting heads.

CULTURAL Diversity Business Practices

cus Careers in Fo Accounting

3E Compan Trish Lady

om Tips fr

Giving business gifts internationally can be tricky. Some cultures attach meaning to certain gifts and colors. For example, in Japan, white chrysanthemums are used only for funerals.

...

mpanies age, co

On aver candidates for y do? and six s 3E Compan uish mental, health, interview ening. Disting ion Q: What doe t their environ tit b op inesses mee each jo e compe A: We help bus ibilities. from th answers ? ons yourself safety resp ting career g your oun sin acc th ar an w wi by rehe you choose estions but I didn’t kno s did qu y atic Wh ial hem nt Q: her ember. tude in mat to pote a strong apti an algebra teac family m ll A: I knew I had that into a career. Luckily, I had tical application for friend or eeting you wi a m to turn ard a prac ed, g the how me tow ol who steered in high scho s: accounting. my math skill

your been key to s that have some factor Q: What are For me. ed success? definitely help s has opportunitie

ing Algebra The basic accounting eq uation is in the form a b c. • To find b, rewrite the equation as b a c. • To find c, rewrite the equation as c a b.

The Math Hints feature with savvy tips and instructions will help you understand and perform math functions related to accounting activities.

The Cultural Diversity feature gives you information about practices and customs in other countries and cultures.

T, FINANCE VICE PRESIDy,ENCarlsbad, California

Us

Computerized Accoun ting

te er for a real esta

er exa skills I learned a different care m goals. The ent role. firm. I then took their long-ter from in my curr panies reach und to draw helping com a better backgro me e gav experience your job? ut abo presents. st challenge it you like mo the intellectual Q: What do finance? onsibilities and president of variety of resp ome a vice A: I like the bec to know to ded nt lls are nee It’s also importa ng. unti to shift acco Q: What ski able t be kground in r urces. You mus a strong bac can help you and other reso A: You need to ways you time, money, ng procedures how to allocate day accounti -today your focus from m goals. -ter long its ieve company ach

Making the Transitio n from Task

The individuals featured in the Accounting Careers in Focus introduce you to a wide range of interesting and attainable career choices in the field of accounting.

arch ral laws, rese state and fede ess. pany follows budget proc that the com manage the on; Work: Ensure s, organize and s administrati Nature of the nce or busines ent opportunitie fina stm in inve ree y companies end deg finance. Man : A master’s and recomm in ded or Nee firm on ng cati public accounti a Training or Edu in nce rs of experie skills, at least 10 yea s, negotiation iding license. planning skill process of dec require a CPA ls: Long-term agement is the lities, and Skil ment skills. Man Aptitudes, Abi s, and manage y skill ion s. icat ines , and compan commun urces of a bus nce, location reso erie the exp use on how best to up, depending roles of $70,000 and ually assume Salary Range: firm, and grad lic accounting revenues. nce in a pub Gain experie Career Path: onsibility. increasing resp

Recording general journal entries

Answer

▲ ▲

1. From the Tasks menu, select General Journa l Entry. 2. Enter the date of the transaction. 3. Enter the source docum ent reference. 4. Enter the account number to be debited . 5. Enter a brief descrip tion of the transaction. 6. Enter the debit amoun t. 7. Enter the account number to be credite d. 8. Enter the credit amoun t. 9. Click Save.

▲

QuickBooks Q & A

▲

QuickBooks Question

▲

How do I enter genera l journal entries in QuickBooks?

work for?

Focus

Computerized Metho ds • Analyze the source document to determine which accoun ts are affected. • Enter the transaction details in the general journal using the account numbers for each ledger account. • The software will calculate the equalit y of debits and credits .

Q&A

Peachtree Question

The Computerized Accounting feature helps you move from a manual accounting system to a computerized system using the Peachtree and QuickBooks accounting software programs.

Careers in Accounting Chapter 2

a Manual to a Compute rized System

Manual Methods

• Analyze the source document to determine which accoun ts are affected. • Using a general journa l form, enter the details of the transac tion. • Check for equalit y of debits and credits .

How do I enter genera l journal entries in Peachtree?

CAREER FACTS

y exciting to e a compan tes can mak What attribu

CHA PTE R 6

General Journal Entries

Durin inform ross as come ac and confident. , prepared

l offic t, n to chief financia s developmen A: Being ope working as a s on busines from that mple, I was path to focu

tically Thinking Cri

MATH HINT S

37

For detailed instructions,

Answer

1. From the Compa ny menu, select Make General Journal Entrie 2. Enter the date of s. the transaction. 3. Enter the account to be debited. 4. Enter the debit amoun t, source document referen ce, and description. 5. Enter the account to be credited. 6. Enter the credit amoun t, source document referen ce, and description. 7. Click Save & Close.

see your Glencoe Accoun ting Chapter Study Guides

and Working Papers.

Chapter 6 Compu terized Accounting

153

xxv

i-xxvii-FM-868829.indd xxv

9/22/05 2:50:58 PM

To the Student Glencoe’s Reading Strategies Use this menu for strategies to get the most from your reading.

Before You Read Set a Purpose • How does the subject of the section relate to your life? • How could you use what you learn in your own life? Preview • Read the chapter and section titles to preview the topics. • Read the headings and questions related to them to learn more about the topic being introduced. • Skim the figures, photos, forms, charts, and graphs. How do they support the topic? • Look for key terms that are boldfaced. How are they defined?

Draw from Your Background • What have you read or heard concerning new information on the topic? • How is the new information different from what you already know? • How will the information that you already know help you understand the new information?

As You Read Predict • Predict events or outcomes by using clues and information that you already know. • Change your predictions as you read and gather new information. Connect • Think about people, places, and events in your own life. Do you see any similarities with those in your textbook? • Can you relate the textbook information to other areas of your life? Question • What is the main idea? • How do the figures, photos, forms, charts, and graphs support the main idea?

Notice Compare and Contrast Sentences • Look for clue words and phrases that signal comparison, such as similarly, just as, both, in common, also, and too. • Look for clue words and phrases that signal contrast, such as on the other hand, in contrast to, however, different, instead of, rather than, but, and unlike. Notice Cause-and-Effect Sentences • Look for clue words and phrases, such as because, as a result, therefore, that is why, since, so, for this reason, and consequently. Notice Chronological Sentences • Look for clue words and phrases, such as after, before, first, next, last, during, finally, earlier, later, since, and then.

Visualize • Pay careful attention to details and descriptions. • Create graphic organizers to show relationships that you find in the information.

After You Read Summarize • Describe the main idea and how the details support it. • Use your own words to explain what you have read. Assess • What was the main idea? • Did the text clearly support the main idea?

• Did you learn anything new from the material? • Can you use this new information in other school subjects or in your personal life? • What other sources could you use to find more information about the topic?

xxvi

i-xxvii-FM-868829.indd xxvi

9/20/05 2:42:23 PM

To the Student

Be an Active Reader! Glencoe’s Top 10 Reasons to Become a Better Reader 10. Give yourself more choices in life. Reading well opens the door to a wider variety of interesting career options. 9. Empower yourself through the written word. Teach yourself sailing, computer skills, the latest techniques in skateboarding. Discover how to create your own Web site. 8. Improve your chances of getting into and graduating from an institution of higher learning. On the average, a person who gets a postsecondary education makes three times more money than a highschool dropout! 7. Increase your chances of getting a job when you look for one. That’s important, considering that the average person will hold 11 different jobs over his or her lifetime. 6. Advance more quickly in your chosen career. In many positions, people with strong reading skills are 10 times as likely to receive training from their employer as those with limited reading skills. 5. Make the country economically stronger. More people reading well means more people contributing to the progress and prosperity of the country. 4. Save money and gain confidence. For example, you’ll be able to pass your driver’s test and read the lease for your first apartment. 3. Be more civic minded. People who read well are more likely to vote and to participate in democratic elections and in civic life. 2. Once learned, never forgotten. Reading is a lifelong skill, like riding a bicycle—once you learn, you’ll never forget! 1. Enjoy life more! Reading not only helps you get ahead and stay ahead in life—but also, it’s fun!

1

i-xxvii-FM-868829.indd 1

9/20/05 2:42:24 PM

UNIT 1

Introduction to Accounting

Personal Finance Q & A Q: Why is accounting important to me? A: Learning accounting can help you to keep track of your personal finances or to start your own business. You may even find that an accounting career is a good fit for your talents and personal interests. Q: What do I need to know if I go into business for myself? A: You will need to know procedures and standards. Accounting procedures help you keep track of your money. Accounting standards provide rules for preparing financial reports. You need financial reports to get bank loans or to get other people to invest in your business. THINK IT OVER Have you ever seen financial information about a company? Where have you seen it? Did you understand what it reported? 2

002-003_UN01_868829.indd 2

9/15/05 11:19:17 AM

Internet Project Risks and Rewards An entrepreneur takes an idea and turns it into a business. This involves risks, but those risks can turn into big rewards. The chart shows the trend of risk-takers’ confidence over nine quarters. You may wonder what chance you have to become a successful entrepreneur. After you complete this project, you may have the answer. Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on WebQuest and select Unit 1. Begin your WebQuest by reading the Task. Continue working on your WebQuest as you study Unit 1.

Chapter

1

2

Page

25 45

THE BIG PICTURE HAPPY DAYS Entrepreneurs confidence in the economy

Confidence

over time.

Q1

Q2

Data: vFinance Investments Inc.

glencoeaccounting.glencoe.com

002-003_UN01_868829.indd 3

Q3

Q4

Q5

Q6

Q7

Q8

Q9

Source: Reprinted by permission from BusinessWeek.

3

9/15/05 11:19:45 AM

CH A P T ER 1

You and the World of Accounting BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe how personal skills, values, and lifestyle goals affect career decisions.

1. What does the chapter title tell you? 2. What do you already know about this subject from personal experience? 3. What gaps exist in your knowledge of this subject?

2.

Find information about a variety of careers.

3.

Set career goals.

4.

Identify career opportunities in the accounting field.

5.

Describe the types of businesses and organizations that hire accountants.

6.

7.

Compare for-profit businesses and not-for-profit organizations. Define the accounting terms introduced in this chapter.

Why It’s Important ▲

To find out if an accounting career might be right for you, you need to get to know yourself and learn about different opportunities.

Exploring the Real World of Business THINKING ABOUT A CAREER

National Geographic Society Have you ever dreamed about hiking to a remote village in Costa Rica or boating to an untouched tropical island? Writers and photographers from National Geographic magazine may have done it. Millions worldwide read National Geographic for images and stories of cultures, nature, science, and technology. It is the jewel of the National Geographic Society—the world’s largest nonprofit scientific and educational organization. The National Geographic Society makes films, books, maps, and radio programs in addition to running a cable TV channel and an award-winning Web site. In any given week, you might find the organization sponsoring a fossil dig in Africa or a study of sharks off the California coast. Producers and accountants work together to fund these projects. The Society employs more than 1,300 people who have a common interest in expanding our vision of the world.

What Do You Think? What type of job opportunities do you think exist at the National Geographic Society?

4

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 4

9/12/05 3:03:36 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE It’s tough to figure out what you want to do with the rest of your life! Career counselors say that most people will have six to seven different careers throughout their lives. Some of us change careers entirely—from archeologist to teacher, or from freelance writer to photographer. Others stay within the same industry, but change specialties—from book designer to Web site designer, or from pediatrician to emergency care physician.

glencoeaccounting.glencoe.com

004-025_CH01_868829.indd 5

Personal Connection 1. What type job do you have now or have you had in the past? Is it in a field you might continue to work in? 2. Imagine yourself in five years. What type of job do you have? Where are you living? What skills are you using?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 1.

5

9/12/05 3:03:42 PM

SECTION 1

BEFORE YOU

READ

Main Idea

A successful career choice begins with learning about yourself.

Read to Learn… ➤ the importance of

choosing a career. (p. 6) ➤ how to assess yourself in

terms of a career. (p. 7) ➤ the resources that are available to help you make career decisions. (p. 10)

Key Terms

skills values lifestyle personality personal interest tests networking

6

Exploring Careers Film producer? Animator? Web site designer? History teacher? Pediatrician? Financial analyst? Environmental consultant? Who—me?

Choosing a Career What Do You Want to Do? Let’s face it: Not many of us know what we want to do with the rest of our lives, especially when we’re still in high school. You may be thinking, “I’ll just take some liberal arts courses in college and something will come up” or “I’ll just work for a while to make some money and then fall into a career.” You know what? Something may come up, and you may just fall into a career; but if you ask people who really love what they do, odds are that they took some time to really get to know themselves and what turned them on. Danielle and Steve have been friends since their freshman year. Like most students, they’ve been too wrapped up with classes, homework, and activities to think about what their lives will be like after high school. This all changed at the start of their senior year. Steve sees it as the end of a long haul, but Danielle sees it as the beginning of a whole new life. Closing his locker door with his elbow, Steve turns to see Danielle smiling at him. “Hey Dani! How’s it going?” “Great,” says Danielle, holding up her class schedule. “They say the last year in high school is always the best.” “What are you taking?” “Let’s see. I have chemistry, literature, algebra, speech, and accounting.” “Ouch, tough schedule! Did you say accounting? I would have never guessed you to be a number cruncher.” “I don’t think I want to just ‘crunch numbers.’ I’ve always aced math, so I figured if I take accounting now, I’ll know if I really like it enough to study it as a career. Besides, there are tons of ads in the paper for accounting jobs. If you’re good at it, you can write your own ticket. Think about it: Companies

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 6

9/12/05 3:04:06 PM

need employees who know how to run their businesses. Plus it’s not just sitting at a desk crunching numbers. My aunt is a financial advisor. She loves her job and travels all over the world.” “Slow down, Dani, it’s only your senior year in high school. Don’t you think it’s a bit too soon to be playing career woman?” “The sooner the better, Steve!” “Maybe you’re onto something here.” Unlike a job, which is simply work for pay, a career is built on a foundation of interest, knowledge, training, and experience. Have you thought of what you may want your career to be? If not, you are not alone.

Assess Yourself in Terms of a Career Vision Who Are You? Before choosing a career, you’ll want to do a little soul-searching. The more you know about yourself, the easier it will be to make career choices. • • • •

What are your personal interests and skills? What are your values, and how will they affect your career? What lifestyle interests you? How will your personality affect a career choice? You have the answers to the questions but just don’t know it yet!

SKILLS & TRAITS

CAREER EXAMPLE

Creative thinking

Fine arts and humanities careers, such as actor, artist, or musician

Knowing how to learn

Training or teaching careers, such as business consultant or training coordinator

Responsibility

Health-related careers, such as surgeon, dental hygienist, or home health aide

Friendliness

Hospitality and recreation careers, including cruise director, hotel manager, or park ranger

Honesty

Child-care workers, veterinarians, and other family and consumer science workers

Decision making

Financial planners, accountants, and other business and office careers

Analytical

Construction careers, including surveyors, general contractors, or electricians

Adaptability

Any of the public service careers, such as teaching, fire fighting, or serving in the armed forces

Self-control

Entrepreneur or manager

Self-esteem

Communications and media occupations, such as computer artist or book editor

Section 1 Exploring Careers

004-025_CH01_868829.indd 7

7

9/12/05 3:04:26 PM

AS YOU

READ

In Your Experience Achieving Success Describe a time when you made a special effort to achieve a goal. How might this experience help you be successful in your career?

Your Interests, Skills, and Traits You’re more likely to enjoy a career that uses your interests, skills , and traits. Skills are activities that you do well. Consider John King. When John was a kid, he built an elaborate fort in his yard. As a teen he studied major metropolitan architecture. When he finished high school, he worked at a graphics company making calendars. The pay was good, but John lost interest and enrolled in school to study his true passion, architecture. Today John is a partner in a successful Los Angeles architecture firm and loves his job. Are you good at math? Do you write well? Are you creative? Do you like to meet lots of new people, or like John, do you enjoy building things? Everyone has different skills and abilities—it’s the combination that gives you a unique selling point. The chart on page 7 lists some skills and traits that employers have identified as being valuable. Although these skills and traits are useful in various situations, the chart shows examples of careers that require them. How many of these traits do you have? Make a list. It will come in handy when you begin to consider careers that interest you.

Values One way to get to know yourself better is to examine your values. Values are the principles you live by and the beliefs that are important to you. Values are really about actions, not words. If you like to spend your free time volunteering at a local hospital or senior center, one of your values might be helping others. What you value and believe may change as you get older. Most people, though, have a basic set of values that they follow throughout their life. As you read this section, think about your personal beliefs. Remember, values are actions, not aspirations. Which values are important to you? Can you think of careers that would benefit from these values? Responsibility. Being responsible means being dependable and taking positive actions, such as showing up on time to take a friend to an appointment or honoring a commitment. If you value responsibility, you might think about a career as a supervisor or manager. Achievement. You value achievement if you try to be successful in whatever you do. I know, you’re thinking, “Who doesn’t want to be a success?” The truth is that wanting and achieving are two different things. For example, if you take action to train outside of regular practices to make first string on the basketball team, you value achieving goals. Relationships. If you especially value interacting with your friends and family, relationships are important to you. After all, sharing the joy of your accomplishments is half the fun. Those who value these types of connections might avoid occupations that require a lot of travel and might base their career decisions on the ability to live close to family and friends. 8

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 8

9/12/05 3:04:32 PM

Compassion. Do you care deeply about people, animals, or special causes? For you, a career that allows you to show your compassion may outweigh all the money in the world. For example, if you love being around animals, you might enjoy a career in veterinary medicine or the marine sciences. Courage. Courage is not just being brave in the face of physical danger. Courage is also about overcoming other fears. For example, it takes courage to make a speech to the whole school, even if you are fearful or nervous. If you can put your beliefs on the line, you may be headed for a career in politics or law. Recognition. If receiving acknowledgement and appreciation of your work is important to you, then you value recognition. You might consider a career as a novelist or a television news reporter. Many people share the same values, but how they apply them is unique to each person. To some, courage may be accepting the challenge of a job they know little about. To others, it may be turning down the big money to do something they really love. Think about your values. What can you learn from your values that will help you narrow your career choices?

Lifestyle Goals Your lifestyle is the way you use your time, energy, and resources. For example, many people devote themselves to work, earn lots of money, and put off the benefits of free time until they’re older. Others accept smaller paychecks and work fewer hours to spend more time with family and friends now. If you want to work as a business manager or accountant for a professional sports team, you’ll have to live in a city that has such a team, even if the weather’s bad! If you want to be an actor, get ready for life on the road. • • • •

What’s really important to you? Do you want to go for the big bucks? Do you want to live in a big city with endless activities or a small town where everyone knows your name? Do you want to collaborate with a group of people or to work solo?

Make a list of how you’d like to spend your time, energy, and resources. These are your lifestyle goals. Try to focus on careers that closely match them.

CULTURAL Diversity Local Dialog

Although English is the official language of business in numerous nonEnglish speaking countries, it is generally appreciated if you make an attempt to learn the local tongue. Learning polite phrases such as “hello” and “thank you” shows that you respect the local culture.

Personality Traits Imagine what it would be like if all your friends had the same personality. What if they were all shy or serious? Even worse, what if they all had the same sense of humor? It’s a good thing we each have our own personality —a set of unique qualities that makes us different from all other people. What is your personality? Are you confident, dependable, funny, friendly, sympathetic? Be honest. Do you prefer being with people or spending your time with things, such as reading books or working with computers? You probably wonder what this has to do with accounting. Well, your personality affects your preferences for working with data, people, or things.

Section 1 Exploring Careers

004-025_CH01_868829.indd 9

9

4/6/06 5:26:57 PM

As you collect information about yourself, you’ll want to complete a personal career profile such as the one shown in Figure 1–1. Use this profile to help you evaluate whether the careers you’re considering match your skills, interests, values, and personality.

Making Career Decisions Where Do You Go from Here? Once you have a clear vision of yourself and how you want to live, you are ready to research careers and set goals.

Research the Possibilities

Figure 1–1 Personal Career Profile Form

How do you find the right career for you? Here are some places to start: Guidance Counselors. School counselors do a lot more than just show you the quickest way to get from your homeroom to the cafeteria. They can help you identify the things you like to do. One way they accomplish this is through testing, called personal interest tests , which help you identify your preferences.

PERSONAL CAREER PROFILE FORM Name

Darla Johnson

Date

December 12

Career

Marketing Manager, Music Industry

Your Values

Career Values

I believe in equal opportunities for all people. I like to be creative.

All kinds of people work in the music industry. As a marketing manager, I would be able to use my creativity, as well as work with other creative people.

Your Interests

Career Duties and Responsibilities

I have a large collection of jazz and blues CDs and keep up with up-and-coming artists that are featured on independent labels. I love getting together with friends and having parties.

As a marketing manager, I would make contacts with music stores and distributors, labels, and artists. I might send out press releases, arrange for artist appearances, and map out company marketing strategies to increase profits.

Your Personality

Personality Type Needed

I am very outgoing and get bored with sitting in class or reading. I have a great imagination and love group discussions.

A marketing manager must work well with people. Sharp communications skills and attention to details are important.

Skills and Aptitudes

Skills and Aptitudes Required

My best subject is history, and I am president of my school’s debate team. I am not big on writing letters or grammar but love to communicate in person.

Good verbal communication skills are essential for a marketing professional. Although history may not be particularly important, good perceptions of what works and what doesn’t work might be important.

Education/Training Acceptable

Education/Training Required

I would be interested in learning more about getting a business degree, but also believe that if I could get in on the ground level in the music industry and learn the ropes, I could be successful as well.

I suppose a degree in marketing might open a lot of doors for me. A knowledge of how marketing and accounting fits into the big picture of a music corporation would definitely help.

10

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 10

9/12/05 3:04:37 PM

Contacts. Networking is making contacts with people to share information and advice. Find out about specific careers through networking. Library. Print materials on every career imaginable can be found in your public library. Try books on careers or magazines that focus on your interests like House & Garden, Metropolitan Home, or BusinessWeek. Internet. The Internet is a great source of educational and career information. Check out ideas for putting together the perfect résumé or browse through job opportunities at Paramount Pictures! Organizations. Professional organizations are groups of people who have common career interests. You can learn about interesting careers by getting to know the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA).

AS YOU

READ

It’s Not What It Seems Network A television network is a group of linked stations. In your personal life, a network is the people you know or can get to know.

Set Career Goals Once you have a clear vision of your interests and the types of careers you want to pursue, it’s time to put a plan into action. Map Out a Plan. For starters you’ll need to make a list of the careers you’ve researched and compare possibilities. The easiest way to do this is to make a chart. List the careers you’re interested in along the top and list your personal information along one side. Where they meet, X marks the spot. After selecting the career choices that look the most promising, decide which one you’ll pursue. Reaching your ultimate career goal is not going to happen overnight. There are many intermediate goals to achieve along the way. Here are some steps to help you achieve your career goals: 1. Decide on a long-term goal. Learn as much as you can about careers that interest you. Visit job fairs to obtain information. 2. Identify actions that will lead to the long-term goal. What skills, education, or training will you need? Make plans early. 3. Take action! Make your plans and put them to work. 4. Diversify your skills. Experience different work environments. 5. Realize your long-term goal. Setting and implementing these steps will help you achieve a career that you desire.

Education. Most careers require some education or training beyond high school. Unfortunately, deciding to further your education and finding the cash to pay for it are two different things. For ideas on help in paying tuition, you can turn to many of the same places you turned to for career information: books, the Internet, and your friend, the guidance counselor. On-the-Job Training. Imagine taking only your favorite school subject and getting paid for it! That’s how on-the-job training works. Suppose you’re thinking about eventually opening your own accounting firm. While in school, you might work as an office assistant at a local accounting firm to learn how accounting services are provided. It’s a great way to find out if accounting is the career for you, and you’ll be paid for your efforts. Internships. Another way to obtain career experience is to work as an intern. Many companies offer summer or longer internships to students. Some offer modest pay. Successful interns are often offered positions in the company once their internships are completed. The key is to become so valuable that they miss you when you’re gone!

Section 1 Exploring Careers

004-025_CH01_868829.indd 11

11

9/12/05 3:04:43 PM

S E C T I O N 1# AFTER YOU

Assessment

READ

Reinforce the Main Idea Draw a diagram like the one shown here. Show how people your age may benefit in their careers by first learning about themselves. Add answer circles as needed.

"ENEFITSOF 3ELF +NOWLEDGE

Do the Math Congratulations! The good news is that you’ve decided to attend a local community college after high school. The bad news is that tuition for an 18-week semester is $1,820. You estimate travel expenses of $20 per week and $300 for books and supplies. You plan to work 20 hours a week, earning $6.75 per hour, and you will apply all your paychecks toward college expenses. Social Security and income taxes will take about 15 percent of your earnings. 1. What is the total cost for a semester? 2. Assume that you have already saved $300 toward your first semester’s costs. Approximately how long will it take to save enough to cover your tuition and books for one semester?

Problem 1–1 Studying Yourself Instructions Think about the things you like to do and your particular skills. Make a list of at least five personal interests or skills. After you complete your list, use the career resource materials described in this section to identify one or more careers that match each interest or skill. Choose one career and write a one-page description of how your skills and interests fit this career.

Problem 1–2 Gathering Career Resources Instructions Use the personal career profile form in Figure 1–1 as a guide, and compare three careers that you find interesting. Use the resources mentioned in this section to gather information: guidance counselors, networking, print materials, the Internet, and professional organizations. You may find other references in your school or local public library. After completing your comparison, write a brief summary; identify which of your choices you prefer and explain why. 12

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 12

9/12/05 3:04:44 PM

SECTION 2

Accounting Careers: The Possibilities Are Endless!

Intro Text Some people believe accounting is boring. There, we said it. It’s a pretty safe bet that you didn’t enroll in an accounting course because you thought it would lead to a career in the spotlight. How often do you see Brad Pitt starring in an action thriller about a jet-setting accountant? Text Question Exactly. However, who do you think develops and approves the budget Textfilms vocab #–# Who do you think advises Mr. Pitt for his to words go intoFigure production? how to invest the hefty salary he makes? You got it—someone just like you, who is good with accounting concepts and knows how to handle money. The point is: Accounting can be a lot of things you would never have imagined. So, if an accounting career matches up with some of your interests and goals, hang in there. We promise there is a lot more to it than crunching numbers!

Heading 1

The Changing Horizon

BEFORE YOU

READ

Main Idea

If you learn accounting, you can choose from a wide variety of careers.

Read to Learn… ➤ how accounting careers

can be exciting. (p. 13) ➤ the different organizations that hire accountants. (p. 13)

Key Terms

Is Accounting More Than Arithmetic? Sure, some careers in accounting can be a little dry, but there are many more that are dynamic and exciting. Think of any business—Warner Music, Nike, the Hard Rock Cafe. They all look to accountants to help run their businesses. Think of your favorite celebrities—maybe Will Smith or Natalie Portman. Most have financial advisors. Movie producers hire accountants to track production costs. Publishers of magazines, such as PC World and Sports Illustrated, depend on accountants to work with national advertisers to keep things running smoothly. In this chapter you will identify career opportunities in the accounting field. Accounting is not just adding and subtracting. An accountant handles a broad range of responsibilities, makes business decisions, and prepares and interprets financial reports. These are skills that successful businesses cannot do without. If you are good, the sky is the limit.

accountant accounting clerk for-profit business not-for-profit organization public accounting firm audit certified public accountant (CPA)

Types of Organizations What Career Opportunities Exist in Accounting? If you still picture accountants huddled over pages of numbers in back offices, the following scenarios should set you straight.

For-Profit Businesses “Okay, everybody. Show time in five minutes.” The announcement comes as the members of the band adjust guitar straps and prepare to go out on stage. A crowd of 30,000 fans, dropping thirty-five bucks a head, waits Section 2 Accounting Careers: The Possibilities Are Endless!

004-025_CH01_868829.indd 13

13

9/12/05 3:04:46 PM

AS YOU

READ

Key Point Where Accountants Work • For-profit businesses • Not-for-profit organizations • Public accounting firms

for their entrance. Drew Taylor jokes with the band just offstage and then watches as they head out to the fans’ applause. Drew gets a rush being backstage amid all the excitement of a live show. As the financial assistant to the band’s business manager, he often spends time at the performances. For Drew, working with numbers came as naturally as his love for music. He studied accounting throughout high school and college, and in his spare time he dabbled with the guitar and hung around recording studios with friends who were in the music business. It wasn’t long before Drew started working as an accounting clerk at a studio. An accounting clerk is an entry-level job that can vary from specializing in one part of the system to doing a wide range of tasks. Drew’s accounting clerk experience and networking efforts landed him a position with one of the music industry’s top business managers. Drew still dreams of recording his own music one day, but for now, he’s quite content helping orchestrate the financial security of his music idols. Entertainers perform to earn a profit. For-profit businesses operate to earn money for their owners. The majority of businesses in the United States are for-profit businesses. Today, computers handle much of the basic accounting work, freeing accountants to do more planning for future operations. Computer technology means that accountants are no longer tied to a desk or an office. If you worked for artists such as Alicia Keys, Maroon5, or Modest Mouse, you would probably spend part of your time traveling. Laptop computers and modems can connect you to your work as you travel to other cities and countries. In order to explore accounting career opportunities, you need to compare the various types of business organizations. Not all organizations are forprofit businesses.

Not-For-Profit Organizations “Listen up, folks! Here’s the draft of the news release we’re sending out tomorrow,” shouts Darin Korman, waving a stack of papers in the air. “We need to get our position before the public while Congress is still considering the environmental legislation. Questions?” “What else are we doing to alert voters to the potential value of this legislation?” a team member asks from the back of the room. Darin, the team leader, opens a folder. “Here’s our total plan. We begin filming a TV spot tomorrow. Next week, the art for our magazine ads will be finished, and they’ll run in six different magazines. We’ll also post a call-to-action on our Web site asking visitors for their support. We can all thank Maya for putting together a budget for the media campaign.” Maya Cruz beams as her boss Darin describes a typical campaign put together for a group—like Sierra Club or Audubon Society—that works to protect and preserve the environment. Such groups operate as not-for-profit organizations, also known as nonprofit organizations. These organizations 14

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 14

9/12/05 3:04:49 PM

operate for purposes other than making a profit. When Maya was very young, her parents founded a similar group dedicated to cleaning up the local waterways. Maya helped her parents in the difficult task of soliciting donations within their community. As she grew older, Maya pursued the study of accounting with the sole purpose of continuing her involvement in environmental causes. It is important to identify the various accounting functions involved with each type of business organization. Most not-for-profit organizations have the goal of balancing their income with expenses rather than earning a profit for owners or investors. Some not-for-profit organizations, like United Way or Boy Scouts of America, get their income from donations. Other organizations get income through tax dollars. Government agencies, such as your school or a federal agency, fall under this category. There are thousands of opportunities in the not-for-profit arena. Like Maya did, you may prefer to combine your interest in accounting with a cause that you hold close to your heart.

AS YOU

READ

Compare and Contrast For-Profits and Notfor-Profits What are the similarities in the work done by accountants at a for-profit business and those employed by a not-for-profit organization? How are their tasks different?

Public Accounting Firms “It seems like all the ducks are in a row.” Jana Passeno takes another look at the Whitley Company accounting reports on her desk. “Yes, we have identified the last few questions we need to go over with Whitley’s accounting manager,” Greg Hally says as he finalizes a short list. Jana and Greg work for the public accounting firm Radcliff & Pratt. Public accounting firms provide clients a variety of accounting services including the independent audit. An audit is the review of a company’s accounting systems and financial statements to confirm that they follow generally accepted accounting principles. An independent audit is not done by company employees. For example, the accountants who work at Whitley cannot do an independent audit. Instead, it is done by certified public accountants who work for public accounting firms. A certified public accountant (CPA) is an accountant who has met certain education and experience requirements and passed a national test. Like doctors and lawyers, CPAs are licensed by the states. Radcliff & Pratt is a small firm, but many certified public accountants work for the four largest accounting firms known as “The Big Four”: Ernst & Young, Deloitte & Touche, KPMG, and PricewaterhouseCoopers. Jana feels pride in her job. When companies such as Coca-Cola or General Electric sell their stock on a U.S. stock exchange, potential buyers depend on audited financial statements to make decisions. Once Jana signs off on the financial statements of a company, the public has greater assurance that the information is correct. Public accounting firms have many job opportunities besides auditing. Possibilities include financial planning and preparing tax returns. You might be interested in a job as a forensic accountant. Forensic accountants take cases that involve issues like fraud or employee theft. Did you know that since 9/11, forensic accountants have played a major role in tracking down suspected terrorists? From entertainment to health care, conservation to entrepreneurship, the career possibilities in accounting are endless!

AS YOU

READ

In Your Own Words Certified Explain the significance of being a “certified” public accountant.

Section 2 Accounting Careers: The Possibilities Are Endless!

004-025_CH01_868829.indd 15

15

9/12/05 3:04:56 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create an organizer like the one shown here. List at least three accounting career opportunities in each type of organization.

#AREER/PPORTUNITIES &OR 0ROFIT"USINESSES

.OT FOR 0ROFIT/RGANIZATIONS

0UBLIC!CCOUNTING&IRMS

Do the Math Assume that the federal government pays new accountants without a master’s degree an annual salary of approximately $23,500. The starting salary for new accountants with a master’s degree is approximately $35,500. If you spent $21,000 to attend graduate school, how many months would you work at a new job in the federal government before the difference in salary pays for your graduate school expenses?

Problem 1–3 Checking Out Accounting Careers Instructions Using the resources described in Section 1, research possible careers for people with accounting degrees. List at least five different careers and the formal training and work experience needed for each. Choose one career as your preference and write a paragraph describing why this career appeals to you.

Problem 1–4 Matching Interests and Careers Instructions Using the three career examples described in this section, make a list of the personal interests and skills of the accountants described in each situation. Compare the list to your own interests and skills. Then think of three types of businesses (or actual companies) for which you might want to work. How would you learn about accounting career opportunities in those companies? Aside from pursuing needed training or education, what else would you do to prepare to work in that career? Share your ideas in class.

Problem 1–5 Researching Public Accounting Firms Instructions Surf the Internet or conduct research in your library to find information about “The Big Four” accounting firms. Create a table of information about each firm and the services the firm provides.

Problem 1–6 Interviewing Accountants Instructions Interview members of the accounting field to investigate entry-level job requirements, career tracks for the profession, and projected trends for the future. Write a short report about your findings. 16

Chapter 1 You and the World of Accounting

004-025_CH01_868829.indd 16

9/12/05 3:04:57 PM

Accounting Careers in Focus ACCOUNTING MANAGER

Keytroller, Inc., Tampa, Florida Mandy Martensen

.. Tips from .

Q: Why did you choose an accounting career? A: In college, I was majoring in a different subject and had to take an accounting class as one of my requirements. I fell in love with accounting as soon as I took that first course. I enjoy math and problem solving.

Q: What are some factors that have been key to your success? A: I’m a quick learner and willing to try anything at least once. I’m not afraid to ask questions or to try my hand at something new. If you want to go far in the accounting field, you must be open to new things.

ccess is In business, su e effort. Help th usually a team g d by lendin group get ahea hand. You will co-workers a initiative but not only show y s who are likel also gain allie en stance wh to provide assi you need it.

Q: What do you find most challenging about your job? A: Working in a team-based environment is especially stimulating. In today’s world you can’t work alone. You usually work with others as a group, especially on large projects. But you also need to learn how to step in and be a leader when necessary.

Q: What advice do you have for accounting students just beginning their careers? A: You have to like what you do or you won’t get very far. If you aren’t sure what path you want to follow, consider earning a degree in business; you’ll take at least one class in every area and something you really enjoy will stand out.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Review the accounting information to make sure that everything is recorded correctly; organize the budget process; hire, train, and supervise accounting staff. Training or Education Needed: A bachelor’s degree in accounting or finance, a master’s degree in business administration, and at least five years of experience. Some companies require an accounting manager to have a CPA license. Aptitudes, Abilities, and Skills: Communication skills, technology skills, and analytical skills. Salary Range: $45,000 to $85,000 depending on location, level of responsibility, and company revenues. Career Path: Start by working as an accounting clerk, and then move into positions of increasing responsibility.

Thinking Critically

Why is it important to be willing to ask for help? Chapter 1 Accounting Careers in Focus

004-025_CH01_868829.indd 17

17

9/12/05 3:04:59 PM

CH A P T ER 1

Summary

Key Concepts 1. A successful career begins with insight into your own personal skills, interests, goals, and lifestyle preferences. Get to know yourself. What you value plays a vital role in deciding what you want to pursue as a career.

Responsibility

Compassion

Achievement

Courage

Relationships

Recognition

As you decide on a career, consider lifestyle goals and personality traits.

Length of Work Week

Work in Teams or Independently

Size of Paycheck

Work with People or Things

Work Environment

Skill Strengths

Growth Potential

Personality Traits

Geographic Location

2. Researching career possibilities can include meeting with a guidance counselor, networking with friends and family, reading books and magazines, doing research on the Internet, and seeking information from professional organizations. Do your homework. Research jobs, salaries, geographic locations, work environments, and growth potentials. You want to know what you are getting into, don’t you?

18

Library

Magazine

Internet

Work Experiences

Networking

Professional and Student Organizations

Chapter 1 Summary

004-025_CH01_868829.indd 18

9/12/05 3:05:04 PM

Summary

CHAPT E R 1

3. Use these strategies to set and accomplish career goals: • • • •

Map out a plan. Consider the education required. Find a part-time job to get some on-the-job training. Check into internships available in your field of interest.

4. Accounting career opportunities vary from the entry-level accounting clerk to the accountant who handles a wide range of responsibilities. Some accountants work for public accounting firms and are certified public accountants. A certified public accountant (CPA) is licensed by the state to perform independent audits of corporations. Public accounting firms provide many job opportunities including • • • •

auditing, financial planning, preparing tax returns, and forensic accounting.

5. Accountants work for almost any organization you can think of. Find a company you are interested in, and you can bet there is an accountant in the picture planning for next year’s budget, chasing down an expense report from the owner, or advising managers on financial issues. For-profit businesses, not-for-profit organizations, and public accounting firms all hire accountants. 6. For-profit businesses operate to earn money for their owners. Not-for-profit organizations operate for other reasons such as charitable or educational purposes. Most not-for-profit organizations have the goal of balancing their income with expenses rather than earning a profit.

Key Terms accountant

(p. 13)

not-for-profit organization

(p. 14)

accounting clerk

(p. 14)

personal interest tests

(p. 10)

audit

(p. 15)

personality

certified public accountant (CPA)

(p. 15)

public accounting firm

for-profit business

(p. 14)

skills

(p. 8)

(p. 9)

values

(p. 8)

lifestyle networking

(p. 9) (p. 15)

(p. 11)

Chapter 1 Summary

004-025_CH01_868829.indd 19

19

9/12/05 3:05:43 PM

C H A P T ER 1 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Personal Skills, Values, and Lifestyle Goals a. Explain how your interests, skills, and values will affect your career choice. b. What are six common values that people have? Career Information a. Describe at least three categories of career information resources. b. Describe how networking is beneficial to career planning. Career Goals a. What is meant by mapping out a career plan? b. Describe five steps that are helpful in achieving career goals. Accounting Career Opportunities a. What does an accountant do? b. Name “The Big Four” accounting firms from which you could likely obtain information about current career opportunities. Organizations That Hire Accountants a. List and describe three types of organizations that offer accounting career opportunities. b. What task can be performed only by certified public accountants employed by public accounting firms? For-Profit Businesses and Not-for-Profit Organizations a. What type of organization exists to earn money for the owners? b. Why would a not-for-profit organization need an accounting professional?

Apply Key Terms Suppose you are preparing to interview a person who works in the accounting field. On a separate sheet of paper, write a list of questions that you will ask in the interview. Incorporate each of the following terms in your questions: accountant accounting clerk audit certified public accountant (CPA) for-profit business lifestyle networking

20

not-for-profit organization personal interest tests personality public accounting firm skills values

Chapter 1 Review and Activities

004-025_CH01_868829.indd 20

9/12/05 3:05:46 PM

Problems

CHAPT E R 1

Problem 1–7 Researching Careers in Your Library It is never too early to begin researching careers.

Instructions Complete your research project using these steps. 1. Using a reference book (such as the Occupational Outlook Handbook), choose a career area that interests you. 2. Research the skills, education, and experience you would need to work in that career area. Your research can utilize any number of resources including books, magazines, and the Internet. 3. Write a brief profile of your chosen career, including a description of jobs in the field, education or training requirements, potential earnings, and working conditions. 4. Present your profile to the class.

Problem 1–8 Researching Careers in Your Local Newspaper Instructions Follow these steps to organize employment information. 1. Review the employment ads in a local or regional newspaper. 2. Collect information on at least 10 job titles plus the skills and education required for each. Include at least two job titles related to the accounting field. 3. Present your information in table format. If you have access to a word processing program, use it to create and print your table.

Problem 1–9 Assessing Your Skills and Interests Instructions Complete an assessment of your personal skills and interests by answering the questions in your working papers. Use the survey included in the working papers, or you can ask your guidance counselor to administer a personal interest test. Using the results of the test, find at least three careers that match your skills and interests.

Problem 1–10 Working with Others Instructions As an accountant for a large business, you might be put in charge of training new hires in the accounting department. Or you might be asked to discuss project cost overruns with a department manager or to present operating results to senior managers. In these situations you need skills other than just your accounting knowledge. For each situation make a list of the skills needed; then decide whether you have those skills and, if not, how you plan to acquire them. Chapter 1 Problems

004-025_CH01_868829.indd 21

21

9/12/05 3:05:52 PM

Problems

C H A P T ER 1

Problem 1–11 Summarizing Personal Traits Instructions Sometimes you can learn about yourself by asking other people how they see you. Ask at least 10 people to name three words they think describe you. Ask them to give you descriptive words such as these: • • • •

Dependable Fun Quick-thinking Decisive

Do not just choose friends. Ask teachers, co-workers, relatives, and others who are willing to give you an honest opinion. Make a list of each person’s descriptions; then summarize your findings by identifying the five characteristics or traits that were mentioned most often. Do these descriptions match your self-perception? Why or why not?

Problem 1–12 Gathering Career Information Instructions Arrange to interview someone who currently works in a career area that interests you. Before the interview prepare a list of the questions you want to ask. You may wish to cover the following topics: • • • •

What are the major tasks that you perform? What do you enjoy most about your job? Is there much variety in your work? What specific skills are involved?

After the interview write two or three paragraphs describing your interview and the information you learned. Explain how this information will help you choose a career.

Problem 1–13 Exploring Careers in Accounting Instructions Choose a local company that interests you, and find out who works as an accountant for the company. Call and ask whether you can observe the person at work for part of a day. Write a summary of your observations, and share the information with the class.

CHALLENGE PROBLEM

Problem 1–14 Exploring Global Careers

Instructions Many U.S. businesses operate in the global economy, which means they need accountants who understand international business. Find a local company that imports or exports products to or from one or more countries. Interview the accounting manager, and find out the skills, formal study, and personal traits he or she looks for in an accountant who works in international accounting. Write a short report about your findings. 22

Chapter 1 Problems

004-025_CH01_868829.indd 22

4/6/06 5:27:39 PM

Winning Competitive Events

CHAPTER 1

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Persons who plan, summarize, analyze, and interpret accounting information are called a. accountants. b. audit supervisors. c. bookkeepers. d. accounting clerks. e. none of these answers.

Business Professionals of America MULTIPLE CHOICE 2. Solve: 2 3/8  1 1/2 (Reduce to lowest terms.) a. 7/8 b. 14/16 c. 1 2/6 d. 1 1/8 3. An employee earns $2,300 each pay period. He is paid on the first and fifteenth of each month. How much does he earn in one year? a. $55,200 b. $59,800 c. $27,600 d. $55,220 4. Solve: 150% of $84 a. $42 b. $72 c. $126 d. $168 5. What is $580 increased by 1/5 of itself? a. $116 b. $145 c. $696 Need More Help? d. $725 Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 1. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

004-025_CH01_868829.indd 23

Chapter 1 Winning Competitive Events

23

10/13/05 6:58:41 PM

C H A P T ER 1 Critical Thinking

Career Possibilities

CASE

Career Advice

a mattoefr

24

Real-World Applications and Connections

STUDY

ETHICS

1. What term describes the way you use your time, energy, and resources? 2. Compare and contrast the tasks of an accounting clerk and a certified public accountant. How are they similar? How are they different? 3. You have just graduated from high school and have found out about an opening for a summer job as an accounting clerk for a popular family-owned restaurant. Using the six components of personal values, predict whether this entry-level accounting job would be fulfilling. 4. What new issues would an accountant face in moving from a job at a forprofit business to a job at a not-for-profit organization? 5. A friend with an interest in an accounting career asked you for advice about the type of job to pursue. You know she has helped organize fund-raising events at school for diabetes research, and that she loves helping children. Recommend an accounting career that you think your friend would find fulfilling. 6. Make a list of the different ways discussed in this chapter to research careers. Create a table that compares advantages and disadvantages of each of these research options. Which one works best for you? Why? Sean Smith is a senior in high school. He is taking an accounting course this year because he wants to be an accountant. Sean likes working with numbers, but he also likes working with people. He plans to go to college but doesn’t know which ones offer accounting programs and what costs are involved. INSTRUCTIONS Take the role of Sean’s career counselor. Write a one-page report advising Sean. Include the following in your report: • Information on how to find the resources he needs to choose a college. • Details on how to set education and career goals. • Steps Sean needs to take over the next several months. • A list of resources Sean might use to learn more about accounting careers, colleges, and financial help.

Padding a Résumé Part of landing a great job is putting together a résumé that effectively represents your skills and background. Imagine that BMW has just opened a new regional headquarters in your area. You would like to work for BMW as a payroll clerk, but you’re afraid you don’t have the right qualifications. A friend suggests that you “change” your résumé to make yourself look better. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Chapter 1 Real-World Applications and Connections

004-025_CH01_868829.indd 24

9/12/05 3:05:58 PM

Real-World Applications and Connections ))

$ )) Communicating ACCOUNTING

Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Writing an Article Write a one-page article for a career newsletter. Describe the field of accounting and the types of businesses and organizations where accountants might work.

Acquiring and Evaluating Information To make a decision, whether personal or business-related, you must be able to acquire and analyze information. ON THE JOB You have graduated and are ready for a job to match your skills and interests! INSTRUCTIONS 1. List the businesses that advertise in a local or regional newspaper. You may want to use a Sunday issue since it is usually packed with ads. 2. Separate the businesses into for-profit and not-for-profit categories. 3. Write a summary of your findings, and describe the accounting career opportunities you think these businesses and organizations might offer.

An International Accounting Career If you want to explore the world, the field of accounting can take you there. To land a job with an international accounting firm, knowledge of international trade laws and country-specific accounting standards will help. Experience with local business customs and a familiarity with the language is also a bonus. INSTRUCTIONS Go to the global Web site of PricewaterhouseCoopers and list five countries in which the firm operates. In the Careers section, select a country from your list and name two career opportunities in that country.

Your Career In this chapter you considered how interests, values, and lifestyle affect your career goals. You can learn more about what you want in a career from personal assessment tests. Meet with your guidance counselor or try an Internet search engine to learn more about these tests. PERSONAL FINANCE ACTIVITY Imagine you have two job offers to work as an accountant. One is for a for-profit business. The work is not very exciting, but the company pays a high salary. Be Your Own Boss The other job is at a not-for-profit organization How would you like to be your own dedicated to a cause that is important to you, boss? Visit glencoeaccounting but it pays about one-half as much. Based on .glencoe.com and click what you discovered in your self-assessment, on Student Center. Click on WebQuest and select Unit 1 to which job fits your goals? Why? continue your Internet project. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 1.

glencoeaccounting.glencoe.com

004-025_CH01_868829.indd 25

CHAPT E R 1

Chapter 1 Real-World Applications and Connections

25

9/12/05 3:06:01 PM

CH A P T ER 2

The World of Business and Accounting BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe profit, risk-taking, and entrepreneurs.

2.

Describe service, merchandising, and manufacturing businesses.

1. 2. 3. 4.

3.

Compare the sole proprietorship, partnership, and corporate forms of business.

4.

List the advantages and disadvantages of each form of business organization.

5.

Describe the purpose of accounting.

6.

Explain financial and management accounting.

7.

Describe three basic accounting assumptions.

8.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business BECOMING AN ENTREPRENEUR

Aveda Corporation Rosemary, peppermint, and almond bark—ingredients for a pot of tea? No, it’s shampoo. Aveda Corporation founder Horst M. Rechelbacher believes that beauty begins with natural ingredients and treating the environment kindly. At 14, Rechelbacher became an apprentice in the beauty and salon business in Europe. Interest in the powers of plants led him to launch Aveda in 1978 with one shampoo. When creating products, the company considers the impact

Define the accounting terms introduced in this chapter.

on the environment and on native communities. For example,

Why It’s Important

trees in India. The company uses recyclable packaging in most

▲

The U.S. free enterprise system offers many different opportunities.

Aveda stopped using an oil that could be poached from sacred of its products and does not test on animals. Today, Aveda products are found in more than 10,000 salons and spas around the world.

What Do You Think? What risks do you think Horst Rechelbacher faced when he launched the Aveda product line?

26

Chapter 2 The World of Business and Accounting

026-045_CH02_868829.indd 26

8/29/05 1:00:09 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Entrepreneurs wear many business hats. They need to know how to sell products or services, what the competition is doing, how to provide good customer service, and how to manage a business as well as understand the finances of the business.

Personal Connection 1. At your workplace, or the workplace of family or friends, who owns the business? 2. If you owned this business, how would you use your accounting knowledge to manage the business?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 2.

glencoeaccounting.glencoe.com

026-045_CH02_868829.indd 27

27

8/29/05 1:00:28 PM

SECTION 1

BEFORE YOU

READ

Main Idea

Exploring the World of Business In this chapter you will learn about different types of businesses and how they are organized. All businesses need information that is generated by accounting systems in the form of reports. You will learn about the different types of accounting and accounting reports.

The United States has a free enterprise system with various kinds of businesses.

The Environment of Business

Read to Learn…

When you hear the word business, what do you think of? Nike, Microsoft, General Motors, IBM, Coca-Cola, or Tower Records? Large businesses like these are certainly players in the world of business today. Your neighborhood convenience store, clothing boutique, video rental store, and grocer are also important contributors in our free enterprise system. In a free enterprise system , people are free to produce the goods and services they choose. Individuals are free to use their money as they wish: spend it, invest it, save it, or donate it. Business owners in this system must compete to attract the customers they need to continue operating. One measure of success in a business operation is the amount of profit it earns. The amount of money earned over and above the amount spent to keep the business operating is called profit . Businesses that spend more money than they earn operate at a loss . Whatever its size, a business must do two things to survive. It must operate at a profit, and it must attract and keep an individual willing to take the risk to run it.

➤ about the environment

of business. (p. 28) ➤ the three types of business operations. (p. 29) ➤ the three forms of business organization. (p. 29)

Key Terms

free enterprise system profit loss entrepreneur capital service business merchandising business manufacturing business sole proprietorship partnership corporation charter

What Makes Up the Business Environment?

The Need for Profit Continued operation and success of a business require profit. Your local pizza parlor must pay for raw materials (flour, sauce, cheese, toppings), equipment (mixers, ovens, freezers), employees, utilities, and rent. The selling price of the pizza must be high enough to cover all costs. Once the owner pays these costs, the money left over is profit.

The Need for a Risk-Taker In a business many people play different roles in daily operations, planning, and management. Inventors create ideas for new products or services. Investors provide money to help businesses get started. Employees supply the labor needed to operate the business. Managers supervise and plan. Role of Entreprenuers. An entrepreneur is a person who transforms ideas for products or services into real-world businesses. Owning a business can offer flexible schedules, self-direction, and financial gain. Yet business ownership is not free from risk. See Figure 2–1 for some pros and cons of entrepreneurship. 28

Chapter 2 The World of Business and Accounting

026-045_CH02_868829.indd 28

8/29/05 1:00:39 PM

Pros

Cons

• You are your own boss.

• You probably need to work long hours.

• You create opportunities for earning money.

• You lose the security of steady wages and medical

• You create and control your work schedule.

benefits an employer provides.

• You choose the people you serve.

• You market your own services or products.

• You select the people who work with you.

• You pay for your own operating expenses.

• You benefit from the rewards of your own hard work.

• You must be motivated and energetic each day.

• You choose your own work hours.

• You face the possibility of losing money.

Traits of Entrepreneurs. Most entrepreneurs share certain behaviors and attitudes. They are motivated self-starters willing to take necessary risks to create profitable and useful businesses. Strong organizational skills, marketing knowledge, and accounting skills are three areas of expertise that contribute to successful business ownership. Entrepreneur—Who, Me? Have you ever considered owning a business? If so, you must first inventory your skills and interests. Do you have good writing and speaking skills? Are you creative? Mechanical? A selfstarter? Do you have accounting or marketing skills? If you have vision, great energy, and imagination, you may have the makings of an entrepreneur! See Figure 2–2 on pages 30–31 for the types of decisions entrepreneurs face.

Figure 2–1 Entrepreneurship: Pros and Cons

Types and Forms of Businesses What Do Businesses Do, and How Are They Organized? Our free enterprise system allows an entrepreneur to choose the kind of business to operate as well as its organizational form.

Types of Business Operations The three types of business operations are service, merchandising, and manufacturing. They are alike in many ways. Each sells products or services to customers and incurs expenses. They differ, however, in some basic ways. Each type needs money to begin and maintain operations; buy or make products; and cover operating costs like rent, utilities, and wages. Money that investors, banks, or business owners supply is called capital . Service Businesses. A service business provides a needed service for a fee. Service businesses include travel agencies, salons like Fantastic Sam’s, repair shops, real estate offices like Century 21, and medical centers. Merchandising Businesses. A merchandising business buys finished products and resells them to individuals or other businesses. Examples are department stores, car dealers, supermarkets, drugstores, and hobby shops. Manufacturing Businesses. A manufacturing business buys raw materials, uses labor and machinery to transform them into finished products, and sells the finished products to individuals or other businesses. Examples are shipbuilders, bakeries, and tire factories.

Forms of Business Organization

Connect to…

LANGUAGE ARTS

In accounting, capital refers to money used to start up or grow a new business. The term comes from the Latin word for head—caput. In ancient times nomadic herdsmen measured their wealth by the number of animals they had. They got this number by counting heads.

To start a business, a potential owner must have a sufficient amount of capital and must choose an appropriate form of business organization. Section 1 Exploring the World of Business

026-045_CH02_868829.indd 29

29

4/6/06 5:29:43 PM

Traits of the Entrepreneur FO 1. BE RE Entrepreneurs are aware of their environment.

IN 2.

• No luthier (A luthier is a maker and repairer of stringed instruments.) • Does the community want one?

BETWEE N

Entrepreneurs evaluate alternatives.

• Customer preferences • Accountant’s guidance • New tools are expensive. Use tools from home and buy new ones only when necessary.

Figure 2–2

With a few exceptions, U.S. businesses are organized in one of three basic ways: sole proprietorship, partnership, or corporation, illustrated in Figure 2–3. Notice that each of the different types of operations can use any form of organization.

Type of Business Operation Figure 2–3 Forms of Business Organization

Form of Business Organization Sole Proprietorship

Partnership

Corporation

X

X

X

Service Merchandising

X

X

X

Manufacturing

X

X

X

Sole Proprietorship. Sole means “single” or “one.” Proprietor means “owner.” A sole proprietorship , therefore, is a business owned by one person. It is sometimes simply called a proprietorship. Being a sole proprietor does not mean working alone. Based on the operation’s size and scope, a sole proprietorship may have many managers and employees. The oldest and most common form of business organization, the sole proprietorship is the easiest business form to start. Little or no legal paperwork (forms and documents) is required. The success or failure of the business depends heavily on the efforts and talent of the owner. The advantages and disadvantages of organizing as a sole proprietorship are shown in Figure 2–4.

Advantages Figure 2–4 Advantages and Disadvantages of a Sole Proprietorship

• • • •

Easy to set up All profits go to owner Owner has total control Few regulations to follow

Disadvantages • • • •

Limited expertise Hard to raise money Owner has all the risks Hard to attract talented employees

Partnership. A partnership is a business owned by two or more persons, called partners, who agree to operate the business as co-owners. Business partners usually enter into a written, legal agreement. This agreement 30

Chapter 2 The World of Business and Accounting

026-045_CH02_868829.indd 30

8/29/05 1:00:46 PM

Traits of the Entrepreneur (continued) Entrepreneurs seek the best solution.

3. AFTER Entrepreneurs turn ideas into actions.

• Find commercial space for rent near a music school and concert hall. Distribute fliers promoting business at classes and concerts.

• Second Life Instrument Repair Shop quickly becomes the community’s top option for making musical instruments sound their best.

specifies each partner’s investment in money or property, responsibilities, and percent of profits and losses. Partnerships are often formed when a business needs more capital than one person can invest. Partnerships are not always small. For example, partnerships like the large accounting firm KPMG may have as many as 1,600 partners and more than 18,000 employees. Figure 2–5 lists some partnership advantages and disadvantages.

Advantages • Easy startup • Pooled skills and talents • More money available

Disadvantages • Risk of partner conflict • Shared profits • Shared risks

Figure 2–5 Advantages and Disadvantages of a Partnership

Corporation. A corporation is a business recognized by law to have a life of its own. Unlike a sole proprietorship and a partnership, a corporation must get permission from the state to operate. This legal permission, called a charter , gives a corporation certain rights and privileges. It also spells out the rules under which the corporation is to operate. Corporations often start as sole proprietorships or partnerships. The business owner(s) may “incorporate” to obtain money needed to expand. To raise this money, organizers sell shares of stock to hundreds or even thousands of people. These shareholders, or stockholders, are the corporation’s legal owners. Figure 2–6 outlines a few advantages and disadvantages of the corporate form of organization.

Advantages • • • •

Easier to raise money Easy to expand Easy to transfer ownership Losses limited to investment

AS YOU

READ

In Your Own Words Corporation A corporation is recognized by law “to have a life of its own.” What does this mean?

Disadvantages • • • •

More costs to start More complex to organize More regulations Higher taxes

Figure 2–6 Advantages and Disadvantages of a Corporation

Regardless of their form as a sole proprietorship, partnership, or corporation, all businesses share common financial characteristics and methods for recording and reporting financial changes. Section 1 Exploring the World of Business

026-045_CH02_868829.indd 31

31

8/29/05 1:01:09 PM

S E C T I O N 1# AFTER YOU

Assessment

READ

Reinforce the Main Idea

$ETAILS

$ETAILS

$ETAILS

-AIN)DEA

$ETAILS

Use a diagram like this one to show details that support the following main idea: The United States has a free enterprise system with various kinds of businesses.

Do the Math Suppose that you bought 500 shares of Pinewood Dairy Corporation for $39 per share several months ago. Yesterday you sold 200 of the shares at the current price of $45 per share. How much money did you gain or lose on the shares that you sold? What was the gain or loss per share? Based on the price of $45 per share, what was the market value of your remaining shares yesterday?

Problem 2–1 Assess Your Entrepreneurship Potential Instructions The characteristics or traits needed to set up an owner-operated business and to run it successfully are listed below. Rank yourself, indicating whether this trait is most like you or least like you. Use the form provided in your working papers.

Most Like Me

Least Like Me

Persistent

5

4

3

2

1

Creative

5

4

3

2

1

Responsible

5

4

3

2

1

Inquisitive

5

4

3

2

1

Goal-oriented

5

4

3

2

1

Independent

5

4

3

2

1

Demanding

5

4

3

2

1

Self-confident

5

4

3

2

1

Risk-taking

5

4

3

2

1

Restless

5

4

3

2

1

List the categories in which you ranked 3 or lower. Identify experiences, activities, and ways in which you could improve your entrepreneurial potential. 32

Chapter 2 The World of Business and Accounting

026-045_CH02_868829.indd 32

8/29/05 1:01:18 PM

SECTION 2

Accounting: The Universal Language of Business

Intro you Textever wondered how the band U2 determines which venues Have they will play, the cost of a tour, how profitable CD sales have been, or how much ticket prices should be? All these issues are probably tackled by the band’s financial team: accountants, clerks, and financial advisors.

Heading 1 Text Question

What Does the Accounting System Do? Whether you are the accountant for a band or the financial manager for a chain of mountain bike stores, accounting methods are universal. The accounting system is designed to collect, document, and report on financial transactions affecting the business. In a manual accounting system , the accounting information is processed by hand. In a computerized accounting system , the financial information is recorded by entering it into a computer. Owners and investors who risk their money depend on accountants to report the results of operations and the financial condition of the businesses in which they invest. Figure 2–7 outlines the inputs, processes, and outputs of an accounting system. All accountants follow the same set of rules to prepare financial reports. The Financial Accounting Standards Board (FASB) issues these rules. The rules are referred to as generally accepted accounting principles or GAAP (pronounced “gap”). Accounting principles provide a way to communicate financial information in a form understood by those interested in the operations and financial condition of a business. Because it is so fundamental to the communication of financial information, accounting is often called the “language of business.” Financial reports are summarized information about the financial status of a business.

Processing

Source Documents

Tasks

• • • •

• Analyzing • Classifying • Recording

Checks Invoices Sales Slips Receipts

READ

Main Idea

The accounting system produces information used to make decisions.

Text vocab words Figure #–# The Accounting System

Inputs

BEFORE YOU

Read to Learn… ➤ how the accounting

system works. (p. 33) ➤ how decision makers use accounting reports. (p. 34) ➤ three important accounting assumptions. (p. 35)

Key Terms

accounting system manual accounting system computerized accounting system GAAP financial reports financial accounting management accounting business entity accounting period going concern

Outputs Financial and Management Accounting Reports • Financial condition • Results of operations • Investments by and distributions to owners

Figure 2–7 How the Accounting System Works Section 2 Accounting: The Universal Language of Business

026-045_CH02_868829.indd 33

33

8/29/05 1:01:20 PM

Instant Recall

Using Accounting Reports for Making Business Decisions

Audits Many people outside a business depend on certified public accountants to audit the company’s financial statements.

The purpose of accounting is to provide financial information about a business or a not-for-profit organization. Individuals also need financial information in order to make decisions. The information found in accounting reports has a wide audience. In general there are two groups that use accounting reports:

AS YOU

READ

Who Uses Accounting Reports?

• •

individuals outside the business who have an interest in the business individuals inside the business

Financial Accounting Financial accounting focuses on reporting information to external users. Financial accounting reports are prepared for individuals not directly involved in the day-to-day operations of the business. Who uses financial accounting reports? The following examples describe just a few situations in which people use financial accounting reports. •

AS YOU

READ

Compare and Contrast Accounting Reports How is financial accounting similar to management accounting? How is it different?

•

•

•

Suppose you wanted to invest in a business, such as Trek Mountain Bikes Inc. You would analyze financial accounting reports to estimate if an investment in the business would be profitable. Individuals or institutions, like banks that loan money to a business, use financial accounting reports to determine whether or not the business will be able to repay loans. Local, state, and federal governments review financial accounting reports. For example, the Internal Revenue Service may compare the tax return and financial reports of a business to determine whether the business is paying the proper amount of taxes. Workers, consumers, union leaders, and competitors are interested in the performance of businesses as presented in financial accounting reports.

Management Accounting Management accounting , which focuses on reporting information to management, is often referred to as accounting for internal users of accounting information. Management accounting reports are prepared for managers involved in making the day-to-day operating decisions like purchasing, hiring, production, payments, sales, and collections. Managers need accounting information so they can decide what to do, how to do it, when to do it, and whether or not the results match the

34

Chapter 2 The World of Business and Accounting

026-045_CH02_868829.indd 34

8/29/05 1:01:23 PM

plans for the future. Figure 2–8 describes some of these decisions.

Accounting Assumptions

Owners and managers use accounting reports to make decisions. • Which flowers are the best sellers?

• Can we purchase a new delivery van?

What Are Three Accounting Assumptions? An assumption is something taken for granted as true. When you attend a movie, you assume the volume will be at a reasonable level, there will be a place to sit, and the film will be in focus. If these assumptions are wrong, the movie will be a disappointing experience. Each business sets up an accounting system for its specific needs, but all businesses follow GAAP. These generally accepted accounting principles include three important assumptions: • • •

• Should we hire more designers? • Can we afford to attend floral conventions in Amsterdam?

Figure 2–8 Managerial Decisions

business entity accounting period going concern

Recall that the corporation is the only form of business that is a separate legal entity. For accounting purposes, however, all businesses are separate entities from their owners. A business entity exists independently of its owner’s personal holdings. The accounting records and reports are maintained separately and contain financial information related only to the business. The owner’s personal financial activities or other investments are not included in the reports of the business. For example, the personal residence of a flower shop owner, valued at $100,000, is not reported in the accounting records of the flower shop. Buildings owned by the business, however, are included in the financial records and reports of the flower shop. For reporting purposes, the life of a business is divided into specific periods of time. An accounting period is a period of time covered by an accounting report. The accounting period can cover one month or three months (quarterly), but the most common period is one year. This assumption is necessary when accountants assign the cost of buildings and equipment over the estimated period of time they will be used. Comparison of reports from one period to the next also makes the accounting period concept necessary. Unless there is evidence to the contrary, accountants assume that a business has the ability to survive and operate indefinitely. In other words a business is expected to continue as a going concern . Although many businesses fail within the first five years, the accountant assumes the business will continue to operate unless it is clear that it cannot survive.

AS YOU

READ

In Your Experience Periodic Reports What kinds of reports have you used to make important decisions?

Section 2 Accounting: The Universal Language of Business

026-045_CH02_868829.indd 35

35

4/6/06 5:30:16 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea List at least three ways people use each type of accounting report. Use an organizer like the one shown here.

5SESOF!CCOUNTING2EPORTS

&INANCIAL !CCOUNTING2EPORTS

-ANAGEMENT !CCOUNTING2EPORTS

Do the Math Suppose that you are opening a 1,000-square-foot baseball card store in a shopping center. You have signed a lease that requires you to pay a monthly rent of $1.75 per square foot, plus 5 percent of your gross annual sales. What is the total amount of rent you will pay in one year if you have sales of $85,000?

Problem 2–2 Using Financial Information Instructions Imagine that you are the manager of Valley Skateboard Shop. The accountant for the business has delivered the news that sales are down by 15 percent compared to last month. She also reports that the rent on the building will be increasing next month by $100. You believe the shop needs a more experienced salesperson and that the building needs new paint and awnings. How might the information delivered by the accountant affect your decisions and course of action?

Problem 2–3 Identifying Accounting Assumptions Suppose you work for a company called Greenwood Sky Divers as a sky-diving instructor. Since you have your pilot’s license, you also give flying lessons on the side. You and the owner of Greenwood Sky Divers both belong to a local club, the Greenwood Eagles, whose members get together for sky dives on weekends. Greenwood Sky Divers is a sole proprietorship that has been in business for six years. The owner of the company regularly reviews financial reports, and the company’s accountant prepares end-of-the-year reports to compare results from one year to the next.

Instructions Decide what information in this paragraph is relevant to accounting for Greenwood Sky Divers. Identify the accounting assumptions for Greenwood, and give an example of each assumption from the information given here. 36

Chapter 2 The World of Business and Accounting

026-045_CH02_868829.indd 36

4/6/06 5:30:23 PM

Accounting Careers in Focus VICE PRESIDENT, FINANCE

3E Company, Carlsbad, California Trish Lady

.. Tips from .

Q: What does 3E Company do? A: We help businesses meet their environmental, health, and safety responsibilities.

Q: Why did you choose an accounting career? A: I knew I had a strong aptitude in mathematics but I didn’t know how to turn that into a career. Luckily, I had an algebra teacher in high school who steered me toward a practical application for my math skills: accounting.

Q: What are some factors that have been key to your success? A: Being open to opportunities has definitely helped me. For

mpanies On average, co ndidates for interview six ca h ing. Distinguis each job open n o the competiti yourself from your answers by rehearsing estions with to potential qu ily member. a friend or fam ting you will During the mee informed, come across as confident. prepared, and

example, I was working as a chief financial officer for a real estate firm. I then took a different career path to focus on business development, helping companies reach their long-term goals. The skills I learned from that experience gave me a better background to draw from in my current role.

Q: A: Q: A:

What do you like most about your job? I like the variety of responsibilities and the intellectual challenge it presents.

What skills are needed to become a vice president of finance? You need a strong background in accounting. It’s also important to know how to allocate time, money, and other resources. You must be able to shift your focus from day-to-day accounting procedures to ways you can help your company achieve its long-term goals.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Ensure that the company follows state and federal laws, research and recommend investment opportunities, organize and manage the budget process. Training or Education Needed: A master’s degree in finance or business administration; at least 10 years of experience in a public accounting firm or in finance. Many companies require a CPA license. Aptitudes, Abilities, and Skills: Long-term planning skills, negotiation skills, communication skills, and management skills. Management is the process of deciding how best to use the resources of a business. Salary Range: $70,000 and up, depending on experience, location, and company revenues. Career Path: Gain experience in a public accounting firm, and gradually assume roles of increasing responsibility.

Thinking Critically

What attributes can make a company exciting to work for? Chapter 2 Accounting Careers in Focus

026-045_CH02_868829.indd 37

37

8/29/05 1:02:11 PM

Summary

CH A P T ER 2 Key Concepts

1. Profit, which is the money left after the owner pays all operating costs, is required so that a business can continue to operate and be successful. Entrepreneurs play an important role in business by taking ideas for products and services and turning them into actual businesses. Most entrepreneurs are willing to take risks, often by providing capital, to create profitable and useful businesses.

Money Earned from Sales




Money Spent to Operate Business




Profit

2. The three types of business operations follow: • Service businesses provide needed services, such as medical, legal, hair styling, and lawn mowing, for a fee. • Merchandising businesses buy products and resell them. • Manufacturing businesses use labor and machinery to transform raw materials into finished products. 3. The three forms of business organization follow: • A sole proprietorship is owned by one person. • A partnership is owned by two or more persons. Partners usually enter into a written, legal agreement. • A corporation is owned by its shareholders. It is recognized by law to have a life of its own. 4. Each of the three business forms has certain advantages and disadvantages as summarized here.

Advantages

38

Sole Proprietorship

• • • •

Partnership

• Easy to start • Skills and talents are pooled • More money available

Easy to set up All profits go to owner Owner has total control Few regulations to follow

Disadvantages • • • •

Limited expertise Hard to raise money Owner has all the risks Hard to attract talented employees

• Conflicts between partners • Profits must be shared • Owners share all risks

Chapter 2 Summary

026-045_CH02_868829.indd 38

8/29/05 1:02:16 PM

Summary

CHAPT E R 2

Advantages Corporation

• • • •

Easy to raise money Easy to expand Easy to transfer ownership Losses limited to investment

Disadvantages • • • •

Costs more to start Complex to organize More regulations Higher taxes

5. Accounting provides financial information that is used to make decisions. To ensure that all financial information is presented in a consistent manner, accountants apply generally accepted accounting principles (GAAP). 6. Financial accounting provides information to external users, people outside the business. Management accounting provides information to internal users, people inside the business. 7. Three basic accounting assumptions follow: • Business entity is the assumption that for accounting purposes, a business exists separately from the personal holdings of its owner. The owner’s personal financial activities are not included in the reports of the business. • Accounting period is the assumption that the life of a business is divided into specific periods of time that are covered by accounting reports. Examples of accounting periods are a month, a quarter, and a year. • Going concern is the assumption that a business has the ability to survive and operate indefinitely unless evidence supports the fact that it cannot.

Key Terms accounting period

(p. 35)

GAAP

(p. 33)

accounting system

(p. 33)

going concern

(p. 35)

business entity

(p. 35)

loss

(p. 28)

capital

(p. 29)

management accounting

(p. 34)

charter

(p. 31)

manual accounting system

(p. 33)

computerized accounting system

(p. 33)

manufacturing business

(p. 29)

corporation

(p. 31)

merchandising business

(p. 29)

entrepreneur

(p. 28)

partnership

(p. 30)

financial accounting

(p. 34)

profit

(p. 28)

financial reports

(p. 33)

service business

(p. 29)

free enterprise system

(p. 28)

sole proprietorship

(p. 30)

Chapter 2 Summary

026-045_CH02_868829.indd 39

39

8/29/05 1:02:19 PM

C H A P T ER 2 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

Profit, Risk-Taking, and Entrepreneurs a. What is one measure of the success of a business? b. What is an entrepreneur? List two characteristics of an entrepreneur. Types of Business Operations a. Name and describe the three types of business operations. b. What is the major difference between a merchandising business and a manufacturing business? Forms of Business Organization a. Describe each of the three forms of business organization. b. What is the purpose of a partnership agreement? Advantages and Disadvantages of Forms of Business Organization a. List two advantages and two disadvantages of each business form. b. What disadvantage do a sole proprietorship and partnership share? Purpose of Accounting a. Describe the purpose of accounting. b. What does the accounting system do? Financial and Management Accounting a. What is the major difference between financial accounting and management accounting? b. Explain how managers use the information in accounting reports. Basic Accounting Assumptions a. What is meant by the term assumption? b. What are three important assumptions of accounting, and what does each mean?

Apply Key Terms On a separate sheet of paper, write a brief definition for each of the following terms: accounting period accounting system business entity charter computerized accounting system corporation entrepreneur financial accounting financial reports free enterprise system GAAP

40

going concern management accounting manual accounting system manufacturing business merchandising business partnership service business sole proprietorship

Chapter 2 Review and Activities

026-045_CH02_868829.indd 40

8/29/05 1:02:21 PM

Problems

CHAPT E R 2

Problem 2–4 Identifying Types of Businesses Instructions In your working papers, indicate whether each of the following businesses is a service business, a merchandising business, or a manufacturing business. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

International Business Machines (IBM) Gap Glendale Memorial Hospital Avis Rent A Car System Ford Motor Company Bank of America Ace Hardware Stores Michigan City Animal Hospital Office Depot Wal-Mart Stores Allstate Insurance U.S. Steel

Problem 2–5 Understanding Accounting Assumptions Instructions In your working papers, indicate the assumption from the list below that best matches each numbered statement. Accounting Period Business Entity Going Concern 1. Accounting reports may cover a month, a quarter, or a year. 2. Accountants expect a business to last indefinitely. 3. The personal property of a business owner is not included in the accounting records of the business. 4. The business has been in operation for several years and is expected to continue. 5. An owner’s personal activities or properties are not mixed with the business activities or properties. 6. The accountant’s report shows how much profit the business earned for one month.

Problem 2–6 Understanding Business Operations Mary Torres owns and operates a bakery. During the past week, she sold 500 loaves of bread at $2.25 per loaf. The raw materials for each loaf cost Ms. Torres $1.80.

CONTINUE

Chapter 2 Problems

026-045_CH02_868829.indd 41

41

8/29/05 1:02:28 PM

Problems

C H A P T ER 2

Instructions In your working papers, write the answers to the following questions: 1. What type of business does Ms. Torres operate? 2. What was the profit on bread sales for the week? 3. Aside from the costs for raw materials, what other costs will Ms. Torres use to calculate her profit for the week?

Problem 2–7 Categorizing Forms of Business Organizations Instructions Match the letter next to each form of business with the appropriate items in the following list of advantages and disadvantages. You may use a letter more than once. Use the form provided in your working papers. A. Sole Proprietorship 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

B. Partnership

C. Corporation

Easier to raise money Limited expertise Higher start-up costs Owner has total control Shared profits Higher taxes Fewer regulations to follow Easy transfer of ownership Risk of conflict between owners Easy to expand

CHALLENGE PROBLEM

Problem 2–8 Working as an Entrepreneur

Instructions Using the form in your working papers, identify each of the following as an advantage or disadvantage of being an entrepreneur. For each item you label a disadvantage, decide what actions you would take to overcome that disadvantage. Analyze and describe how your actions might affect the profit your business earns. 1. 2. 3. 4. 5. 6. 7. 42

Risking the loss of your savings Deciding what you and everyone else needs to do each day Lacking steady wages and employee benefits Choosing when and where to work Keeping the financial benefits of your hard work Choosing the people you want to work with Paying all the expenses of a new business

Chapter 2 Problems

026-045_CH02_868829.indd 42

8/29/05 1:02:30 PM

Winning Competitive Events

CHAPTER 2

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. A business in which two or more persons combine their assets is called a(an) a. corporation. b. sole proprietorship. c. partnership. d. merchandising business. e. none of these answers. 2. An example of an accounting assumption is a(n) a. accounting system. b. accounting statement. c. going concern. d. computerized accounting. 3. A ________ buys raw materials and transforms them into finished products. a. merchandising business b. manufacturing business 4. The business entity concept means that a. a business exists. b. the business’s and owner’s personal records should not be mixed. c. a business is successful. d. none of the above.

Business Professionals of America MULTIPLE CHOICE 5. A set of rules used by all accountants to provide a consistent form in which to provide financial information is referred to as a. American CPA Rules. b. GAAP. c. Financial Accounting. d. Management Accounting.

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 2. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

026-045_CH02_868829.indd 43

Chapter 2 Winning Competitive Events

43

10/13/05 7:00:09 PM

C H A P T ER 2 Critical Thinking

Free Enterprise

CASE

STUDY

Entrepreneurship

ETHICS

Becoming an Entrepreneur

a mattoefr

))

$ )) Communicating ACCOUNTING

44

Real-World Applications and Connections

1. Which accounting assumption separates the owner’s personal finances from the financial activities of the business? 2. What is the difference between a sole proprietorship and a partnership? 3. Consider the businesses at your local mall. What type of business operation is the most popular? How do you think most of the businesses are organized? 4. Compare and contrast merchandising and manufacturing businesses. 5. Think of a business you would like to start. Describe the business operation and choose the best form of organization for your new business. Why did you choose this particular form of business organization? 6. Evaluate the going concern principle. Why should we use it if many businesses fail within the first five years? Interview two or three local entrepreneurs. If you need help finding entrepreneurs, contact your local chamber of commerce or other business organizations. INSTRUCTIONS 1. Prepare questions such as these: • How did you get the idea for your business? • How did you finance the business? • What skills have helped you start and run the business? • What personal qualities have helped you be successful? • What has been your biggest challenge in starting a business? • What advice would you offer to other would-be entrepreneurs? 2. Conduct the interviews, and then write a general profile of the qualities and skills of a successful entrepreneur. Use information from all of your interviews. 3. After writing your profile, decide whether you are entrepreneurial material. Explain why or why not. Imagine that you work for a local day-care center. You attend a company meeting to discuss new services that would help the center stand out from its competition. You think you can use the services discussed to become an entrepreneur—by opening your own day-care center. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Summarizing Success Locate and read a current magazine article featuring a successful entrepreneur. Try periodicals like BusinessWeek, Forbes, or Inc. Write a summary of the article, and explain why you think the person succeeded.

Chapter 2 Real-World Applications and Connections

026-045_CH02_868829.indd 44

8/29/05 1:02:33 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Individual Responsibility High-performance workers exhibit perseverance and excellence in their job duties. Working well and showing a high level of concentration on any task indicates you can assume individual responsibility for your work. ON THE JOB As an accounting clerk for Prints-in-a-Minute, you prepare the financial statements for the owner, José Tirado. As you prepare for your year-end meeting with Mr. Tirado, you locate an error in the financial reports. What do you do? INSTRUCTIONS 1. Mr. Tirado relies on you for accuracy. Write a memo to him explaining what has occurred and your plan for correcting the problem. 2. Mr. Tirado has read the memo and wants to talk with you. Pair up with another student and role-play the conversation, one of you as the accounting clerk, the other as Mr. Tirado. Discuss how you will fix the mistake.

International Accounting Standards When two companies from different countries prepare financial statements, do you think they use the same accounting rules? If both companies use International Accounting Standards (IAS), the statements would be comparable and understandable. The International Accounting Standards Board (IASB) develops accounting rules so that investors can compare financial statements of publicly traded companies from any country. Since International Accounting Standards are not always the same as U.S. generally accepted accounting principles (GAAP), it is important to know which rules were used to prepare financial statements. INSTRUCTIONS Explain why a U.S. company might choose to prepare its financial statements using both GAAP and IAS.

Your Job Application Almost all employers require you to fill out a job application as part of the hiring process. The quality of your job application can determine whether you “get in the door” for a job interview. PERSONAL FINANCE ACTIVITY Suppose you are preparing for a job interview two weeks Getting the Word Out from now. What type of questions do you Does anybody really care think you would have to answer on your job about accounting information? application form? Make a list of the parts of a Read all about it! Visit job application you think you would have to fill glencoeaccounting .glencoe.com and click out. Do you think you are well prepared? Why on Student Center. Click on or why not? WebQuest and select Unit 1 to PERSONAL FINANCE ONLINE Log on to continue your Internet project. glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 2.

glencoeaccounting.glencoe.com

026-045_CH02_868829.indd 45

CHAPT E R 2

Chapter 2 Real-World Applications and Connections

45

8/29/05 1:02:36 PM

UNIT 2

The Basic Accounting Cycle

Personal Finance Q & A Q: Why do I need to know about the accounting cycle? A: In all aspects of your life, you will need to convert economic events into useful information. Q: What is an example of useful information? A: An example is a report showing how much money you earned, saved, and spent in a given period. THINK IT OVER What economic events occur in your life in a one-month period? How can you organize that information so that it is useful to you? 46

046-047_UN02_868829.indd 46

8/24/05 2:32:18 PM

Internet Project A Whole New Ball Game Soccer is one of the world’s most popular sports. However, in the United States, professional soccer has a history of losing money. That situation is changing as the U.S. fan base grows. In this project you will explore the business side of professional sports. Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on WebQuest and select Unit 2. Begin your WebQuest by reading the Task. Continue working on your WebQuest as you study Unit 2. Chapter

3

6

9

10

11

Page

75 161 247 275 303

THE BIG PICTURE WINNERS The world s largest sports franchises, based on revenue. MILLIONS OF DOLLARS

MANCHESTER UNITED, English Premiership soccer NEW YORK YANKEES, Major League Baseball JUVENTUS, Italian Serie A soccer A.C. MILAN, Italian Serie A soccer WASHINGTON REDSKINS, NFL Data: Deloitte

$303.4* $294.2

$263.4 $241.6 $238.6

*Revenues converted from euros to dollars

Source: Reprinted by permission from BusinessWeek.

glencoeaccounting.glencoe.com

046-047_UN02_868829.indd 47

47

9/1/05 1:59:08 PM

CH A P T ER 3

Business Transactions and the Accounting Equation BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe the relationship between property and financial claims.

2.

Explain the meaning of the term equities as it is used in accounting.

1. 2. 3. 4.

3.

List and define each part of the accounting equation.

4.

Demonstrate the effects of transactions on the accounting equation.

5.

6.

Check the balance of the accounting equation after a business transaction has been analyzed and recorded. Define the accounting terms introduced in this chapter.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business INVESTING CAPITAL

HARPO Productions, Inc. Time magazine called her one of the “100 Most Influential People of the 20th Century,” but millions of daytime television viewers know her as Oprah. Breaking records at every turn, Oprah Winfrey was the youngest person to anchor the news at Nashville’s WTVF-TV. She was the first woman to own and produce her own talk show and the first African-American

▲

Why It’s Important

woman to become a billionaire.

To understand the financial condition of any business, you must first understand the accounting equation.

HARPO Productions, Inc., the company that produces

In 1986, investing her own money, Winfrey created The Oprah Winfrey Show. Guests have included celebrities such as Gwyneth Paltrow and Denzel Washington. The talk show generates a tidy $104 million each year. HARPO also produces movies, videos, books, and O: The Oprah Magazine.

What Do You Think? What kinds of assets do you think might have been purchased with the capital that Oprah Winfrey invested in HARPO Productions, Inc.?

48

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 48

4/6/06 5:32:20 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Every business has assets, liabilities, and owner’s equity—the elements in the basic accounting equation that you will study in this chapter. A television studio’s assets include cameras and computers. Its liabilities may include unpaid bills to videotape suppliers. The owner’s equity of a business is what the business is worth.

glencoeaccounting.glencoe.com

048-075_CH03_868829.indd 49

Personal Connection 1. In your workplace what types of assets does the business have? 2. What types of debts or liabilities would you imagine the business to have?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 3.

49

9/13/05 4:37:34 PM

SECTION 1

BEFORE YOU

READ

Main Idea

Any item of property has at least one financial claim against it.

Read to Learn… ➤ what it means to own

property. (p. 50) ➤ the two types of financial claims to property. (p. 51)

Key Terms

property financial claim credit creditor assets equities owner’s equity liabilities accounting equation

Property and Financial Claims In Chapter 2 you learned that accounting is the language of business. In this chapter you will learn how to apply basic accounting concepts and terminology. You will also learn how the accounting equation expresses the relationship between property and the rights, or claims, to the property. United Parcel Service (UPS), a corporation that provides global delivery services, uses accounting reports to communicate with its managers, employees, and investors. The UPS financial reports identify the property used in the business, such as airplanes, trucks, and computers. The reports also show how the company obtained the property, either from loans or from funds provided by investors.

Property What Is Property? The right to own property is basic to a free enterprise system. Property is anything of value that a person or business owns and therefore controls. When you own an item of property, you have a legal right to that item. For example, suppose you paid $600 for a mountain bike. As a result of the payment, you own the bike. If you had rented the bike for the weekend instead of buying it, you would pay a much smaller amount of money, but you would have the bike for only a limited time. You would have the right to use the bike for the weekend, but you would not own it. Businesses also own property. One of the purposes of accounting is to provide financial information about property and financial claims to that property. A financial claim is a legal right to an item. In accounting, property and financial claims are measured in dollar amounts. Dollar amounts measure both the cost of the property and the financial claims to the property. In our mountain bike example, since you paid $600 cash to buy the bike, you have ownership and a financial claim of $600 to the bike. This relationship between property and financial claims is shown in the following equation. Property (Cost)



Financial Claims

Bike



Your Claim to the Bike

$600



$600

When you buy property with cash, you acquire all of the financial claims to that property at the time of purchase. What happens to the 50

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 50

4/6/06 5:32:33 PM

financial claim, however, when you don’t pay for the property right away? When you buy something and agree to pay for it later, you are buying on credit . The business or person selling you the item on credit is called a creditor . A creditor can be any person or business to which you owe money. When you buy property on credit, you do not have the only financial claim to the property. You share the financial claim to that property with your creditor. For example, suppose you want to buy a $100 lock for the mountain bike, but you have only $60. You pay the store $60 and sign an agreement to pay the remaining $40 over the next two months. Since you owe the store (the creditor) $40, you share the financial claim to the lock with the creditor. The creditor’s financial claim to the lock is $40 and your claim is $60. The combined claims equal the cost of the property. Your purchase of the lock can be expressed as an equation: PROPERTY  FINANCIAL CLAIMS Property



Bike Lock

 Creditor’s Financial Claim  Owner’s Financial Claim

$100

Financial Claims $40





$60

As you can see, two (or more) people can have financial claims to the same property. Only the property owner has control of the property. For example, suppose that you buy a used vehicle for $8,000. You pay $1,200 in cash and take out a loan from the credit union for the remaining $6,800. Property

Financial Claims



Vehicle

 Creditor’s Financial Claim  Owner’s Financial Claim

$8,000



$6,800



$1,200

As the owner, you have control of the vehicle. However, if you don’t make the payments to the credit union, the credit union can exercise its legal claim to the vehicle and you will lose ownership.

Financial Claims in Accounting What Are the Two Types of Equities? Property or items of value owned by a business are referred to as assets . Businesses can have various types of assets, such as: • • • • •

cash office equipment manufacturing equipment buildings land Section 1 Property and Financial Claims

048-075_CH03_868829.indd 51

51

4/6/06 5:32:37 PM

The accounting term for the financial claims to these assets is equities . Let’s explore the meaning of the term equities by introducing Maria Sanchez and her new business, Roadrunner Delivery Service, organized as a sole proprietorship. Suppose Roadrunner Delivery Service purchases a delivery truck for $10,000. Roadrunner makes a cash down payment of $3,000 to the seller. A local bank loans Roadrunner the remaining $7,000. Both Roadrunner and the bank now have financial claims to the truck.

Property




Creditor’s Financial Claim



Owner’s Financial Claim

Truck $10,000




$7,000



$3,000

Over the years as Roadrunner repays the loan, its financial claim will increase. As less money is owed, the financial claim of the creditor (the bank) will decrease. For example, after Roadrunner pays one-half of the loan ($7,000  ½
$3,500), the financial claims to the property will change as follows:

AS YOU

READ

Compare and Contrast Assets and Liabilities How are assets and liabilities similar? How are they different?

Property




Creditor’s Financial Claim

Truck $10,000




$3,500

basic accounting equation is in the form a
b  c. • To find b, rewrite the equation as b
a  c. • To find c, rewrite the equation as c
a  b.

52



$6,500

When the loan is completely repaid, the creditor’s financial claim will be canceled. In other words the owner’s financial claim will then equal the cost of the truck. In accounting there are separate terms for owner’s claims and creditor’s claims. The owner’s claims to the assets of the business are called owner’s equity . Owner’s equity is measured by the dollar amount of the owner’s claims to the total assets of the business. The creditor’s claims to the assets of the business are called liabilities . Liabilities are the debts of a business. They are measured by the amount of money owed by a business to its creditors. The relationship between assets and the two types of equities (liabilities and owner’s equity) is shown in the accounting equation : ASSETS
LIABILITIES  OWNER’S EQUITY

MATH HINTS Using Algebra The



Owner’s Financial Claim

Property

Assets


Creditor’s Financial Claim  Owner’s Financial Claim




Liabilities



Owner’s Equity

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 52

9/13/05 4:38:52 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Use a diagram like this one to describe the financial claims of creditors and owners.

,IABILITIES

/WNERS %QUITY !SSETS

Do the Math Owner’s equity can be expressed as a fraction of the total equities. It can also be expressed as a decimal. Consider the following example: Assets
Liabilities  Owner’s Equity $10,000
$9,000  $1,000 Owner’s equity is equal to 1/10, or 10 percent, of the total equities: Owner’s Equity
$1,000
1/10
0.10

Total Equities $10,000

 

Convert the following fractions into decimals. 1

1

1

2. ⁄5

1. ⁄2

4

3. ⁄3

7

4. ⁄5

5. ⁄8

7

6. ⁄10

Convert the following decimals into fractions. 7. 0.889

8. 0.60

9. 0.375

10. 0.25

11. 0.667

12. 0.75

Problem 3–1 Balancing the Accounting Equation Instructions Determine the missing dollar amount indicated by the question mark in each equation. Write each missing amount in your working papers.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

ASSETS




LIABILITIES



OWNER’S EQUITY

$17,000 ? $10,000 ? $ 8,000 $20,000 ? $30,000 $22,000 $25,000 ? $ 7,500















$ 7,000 $ 6,000 ? $ 9,000 $ 2,000 $ 7,000 $12,000 ? $ 1,000 $ 5,000 $10,000 ?

           

? $20,000 $ 7,000 $17,000 ? ? $ 4,000 $22,000 ? ? $25,000 $ 3,000 Section 1 Property and Financial Claims

048-075_CH03_868829.indd 53

53

9/13/05 4:38:54 PM

SECTION 2

BEFORE YOU

READ

Main Idea

Accounts are used to analyze business transactions.

Read to Learn… ➤ how businesses use

accounts. (p. 54) ➤ the steps used to analyze a business transaction. (p. 55)

Key Terms

business transaction account accounts receivable accounts payable investment on account

AS YOU

READ

It’s Not What It Seems Accounts The word accounts might bring to mind checking accounts or credit card accounts. In an accounting system, accounts are subdivisions of the accounting equation.

54

Transactions That Affect Owner’s Investment, Cash, and Credit When you purchased a new sweater, bought popcorn at the movies, or put cash in your savings account, you were participating in business transactions. Business transactions involve the purchase, sale, or exchange of goods and services.

Business Transactions How Are Accounts Used? A business transaction is an economic event that causes a change— either an increase or a decrease—in assets, liabilities, or owner’s equity. The change is reflected in the accounting system of the business. When a business buys a computer with cash, its cash decreases, but its computer equipment increases. It records increases and decreases caused by business transactions in specific accounts. An account is a subdivision under assets, liabilities, or owner’s equity. It shows the balance for a specific item and is a record of the increases or decreases for that item. Accounts represent things in the real world, such as money invested in a business or owed to a creditor. An account for office furniture represents the dollar cost of all office furniture the business owns. Every business sets up its accounts and its accounting system to meet its needs. The number of accounts needed varies. Some businesses use only a few accounts, but others use hundreds. No matter how many accounts a business has, all of its accounts may be classified as either assets, liabilities, or owner’s equity. Roadrunner Delivery Service uses these accounts:

Assets Cash in Bank Accounts Receivable Computer Equipment Office Equipment Delivery Equipment




Liabilities Accounts Payable



Owner’s Equity Maria Sanchez, Capital

The second asset account listed is Accounts Receivable. Accounts receivable is the total amount of money owed to a business—money to be received later because of the sale of goods or services on credit. The Accounts Receivable account is an asset because it represents a claim to the assets of other people or businesses. It represents a future value that eventually will bring cash into the business. When the business receives payment, it cancels the claim.

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 54

9/13/05 4:38:57 PM

AS YOU

READ

The liability account is Accounts Payable. Accounts payable is the amount owed, or payable, to the creditors of a business. The owner’s equity account title is the owner’s name, a comma, and then the word Capital.

Key Point

Effects of Transactions on the Accounting Equation

Business Transactions Every business transaction affects at least two accounts.

What Happens to the Accounting Equation? When a business transaction occurs, an accounting clerk analyzes the transaction to see how it affects each part of the accounting equation. Analyzing business transactions is simple. Use the following steps.

B u s i n e s s Tr a n s a c t i o n ANALYSIS

Identify Classify / Balance

1. Identify the accounts affected. 2. Classify the accounts affected. 3. Determine the amount of increase or decrease for each account affected. 4. Make sure the accounting equation remains in balance.

Most businesses have the following types of transactions: investments by the owner, cash transactions, credit transactions, revenue and expense transactions, and withdrawals by the owner.

Investments by the Owner An investment is money or other property paid out in order to produce profit. Owner Maria Sanchez made two investments in her business, Roadrunner Delivery Service. The first was a cash investment; the second was a transfer of property.

B u s i n e s s Tr a n s a c t i o n 1 Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. ANALYSIS

Identify

Classify / Balance

1. Cash transactions are recorded in the account Cash in Bank. Maria Sanchez is investing personal funds in the business. Her investment in the business is recorded in the account called Maria Sanchez, Capital. 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s equity account. 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000. 4. The accounting equation remains in balance.

Assets


Liabilities 

Cash in Bank Trans. 1

$25,000


Owner’s Equity Maria Sanchez, Capital

0



$25,000

Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit

048-075_CH03_868829.indd 55

55

9/13/05 4:39:01 PM

B u s i n e s s Tr a n s a c t i o n 2 Maria Sanchez transferred two telephones valued at $200 each from her home to the business. ANALYSIS

Identify

Classify / Balance

1. Maria Sanchez gave two telephones to the business. This affects the account Office Equipment. The investment of these assets affects the account Maria Sanchez, Capital. 2. Office Equipment is an asset account. Maria Sanchez, Capital is an owner’s equity account. 3. Office Equipment is increased by $400. Maria Sanchez, Capital is increased by $400. 4. The accounting equation remains in balance.

Assets AS YOU

READ

Instant Recall Business Entity Assumption The financial activities and records of the owner are kept separate from those of the business.


Liabilities  Owner’s Equity

Cash in Bank

Office Equipment

Prev. Bal. Trans. 2

$25,000

0 $400

Balance

$25,000 

Maria Sanchez, Capital 0

$400




$25,000 400

0

$25,400



Cash Payment Transactions Transaction 3 is the cash purchase of an asset. Any asset purchased for cash is recorded this way, but the account name of the asset purchased may vary. Transaction 3 affects only the assets side of the equation. Roadrunner exchanged one asset (cash) for another asset (computer equipment).

B u s i n e s s Tr a n s a c t i o n 3 Roadrunner issued a $3,000 check to purchase a computer system. ANALYSIS

Identify

Classify / Balance

1. Transactions involving any type of computer equipment are recorded in the Computer Equipment account. The business paid cash for the computer system, so the account Cash in Bank is affected. Check payments are treated as cash payments and are recorded in Cash in Bank. 2. Computer Equipment and Cash in Bank are both asset accounts. 3. Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000. 4. The accounting equation remains in balance.

Assets

56


Liabilities  Owner’s Equity

Cash in Bank

Computer Equipment

Office Equipment

Prev. Bal. Trans. 3

$25,000 3,000

0 $3,000

$400

Balance

$22,000 

$3,000



$400

Maria Sanchez, Capital 0


0

$25,400 

$25,400

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 56

9/13/05 4:39:12 PM

AS YOU

Credit Transactions Now that you have learned about cash transactions, let’s look at how the use of credit affects the accounting equation. When a business buys an item on credit, it is buying on account . In the next four transactions, you will learn about a purchase on account, a sale on account, a payment made on account, and a payment received on account.

READ

In Your Experience On Account Individuals as well as businesses buy things on account. What are some items that individuals buy on account?

B u s i n e s s Tr a n s a c t i o n 4 Roadrunner bought a used truck on account from North Shore Auto for $12,000. ANALYSIS

1. Roadrunner purchased a truck to be used as a delivery vehicle, so the account Delivery Equipment is affected. The business promised to pay for the truck at a later time. The promise to pay is a liability; therefore, the Accounts Payable account is affected. 2. Delivery Equipment is an asset account. Accounts Payable is a liability account. 3. Delivery Equipment is increased by $12,000. Accounts Payable is also increased by $12,000. 4. The accounting equation remains in balance.

Identify

Classify / Balance

Assets Cash in Bank


Liabilities  Owner’s Equity

Computer Equipment

Office Equipment

Delivery Equipment

Accounts Payable

Maria Sanchez, Capital

Prev. Bal. $22,000 Trans. 4

$3,000

$400

0 $12,000

0 $12,000

$25,400

Balance

$3,000

$22,000 



$400



$12,000


$12,000 

$25,400

B u s i n e s s Tr a n s a c t i o n 5 Roadrunner sold one telephone to Green Company for $200 on account. ANALYSIS

Identify

Classify / Balance

1. Since Roadrunner has agreed to receive payment for the telephone at a later time, the Accounts Receivable account is affected. The business sold the telephone, so the account Office Equipment is also affected. 2. Both Accounts Receivable and Office Equipment are asset accounts. 3. Accounts Receivable is increased by $200. Office Equipment is decreased by $200. 4. The accounting equation remains in balance.

Assets Cash in Bank Prev. Bal. $22,000 Trans. 5 Balance

$22,000 


Liabilities  Owner’s Equity

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

0 $200

$3,000

$400 200

$12,000

$200

 $12,000


$200 

$3,000



Accounts Payable

Maria Sanchez, Capital

$12,000

$25,400

$12,000 

$25,400

Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit

048-075_CH03_868829.indd 57

57

9/13/05 4:39:13 PM

B u s i n e s s Tr a n s a c t i o n 6 Roadrunner issued a check for $350 in partial payment of the amount owed to its creditor, North Shore Auto. ANALYSIS

1. The payment decreased the total amount owed to the creditor, so Accounts Payable is affected. Payment was made by check, so the account Cash in Bank is affected. 2. Accounts Payable is a liability account. Cash in Bank is an asset account. 3. Accounts Payable is decreased by $350. Cash in Bank is also decreased by $350. 4. The accounting equation remains in balance.

Identify

Classify / Balance

Assets Cash in Bank


Liabilities  Owner’s Equity

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

Accounts Payable

Maria Sanchez, Capital

Prev. Bal. $22,000 Trans. 6 350

$200

$3,000

$200

$12,000

$12,000 350

$25,400

Balance

$200

$200

 $12,000


$11,650 

$25,400

$21,650 



$3,000



B u s i n e s s Tr a n s a c t i o n 7 Roadrunner received and deposited a check for $200 from Green Co. The check received is full payment for the telephone sold on account in Transaction 5. ANALYSIS

Identify

Classify / Balance

1. The check decreases the amount owed to Roadrunner, so Accounts Receivable is affected. A check is given in payment, so Cash in Bank is affected. 2. Accounts Receivable and Cash in Bank are asset accounts. 3. Accounts Receivable is decreased by $200. Cash in Bank is increased by $200. 4. The accounting equation remains in balance.

Assets


Liabilities  Owner’s Equity

Cash in Bank

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

Accounts Payable

Maria Sanchez, Capital

Prev. Bal. Trans. 7

$21,650 200

$200 200

$3,000

$200

$12,000

$11,650

$25,400

Balance

$21,850 

$0



$3,000



$200

 $12,000
$11,650 

$25,400

As you can see, each business transaction causes a change in assets, liabilities, or owner’s equity. Analyzing each transaction to see how it affects the accounting equation keeps everything in balance.

58

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 58

9/13/05 4:39:15 PM

Assessment

SECTION 2 AFTER YOU

READ

Reinforce the Main Idea

Create a diagram like the one shown here. For the boxes marked “?”, fill in the correct labels and give one example of a related account for each category.









/WNERS%QUITY

,EO*ONES #APITAL

Do the Math The basic accounting equation is in the form of A
L  OE 1. What is the algebra equation to find L? 2. What is the algebra equation to find OE? Using the rules of algebra, determine the missing dollar amount in each equation.

Assets ?




Liabilities



Owner’s Equity

$9,000

$21,000

$25,000

?

$11,000

$10,000

$2,000

?

Problem 3–2 Determining the Effects of Transactions on the Accounting Equation Instructions Use these accounts to analyze the business transactions of WordService. Assets Cash in Bank Accounts Receivable Computer Equipment Office Furniture




Liabilities Accounts Payable



Owner’s Equity Jan Swift, Capital

On the form provided in your working papers, identify the accounts affected by each transaction and the amount of increase or decrease in each account. Make sure the accounting equation is in balance after each transaction. 1. Jan Swift, owner, deposited $30,000 in the business checking account. 2. The owner transferred to the business a desk and chair valued at $700. 3. WordService issued a check for $4,000 for the purchase of a computer. 4. The business bought office furniture on account for $5,000 from Eastern Furniture. 5. The desk and chair previously transferred to the business by the owner were sold on account for $700. 6. WordService wrote a check for $2,000 in partial payment of the amount owed to Eastern Furniture Company. Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit

048-075_CH03_868829.indd 59

59

9/13/05 4:39:17 PM

SECTION 3

BEFORE YOU

READ

Main Idea

Owner’s equity is changed by revenue, expenses, investments, and withdrawals.

Read to Learn… ➤ how revenue and

expenses affect owner’s equity. (p. 60) ➤ how withdrawals affect owner’s equity. (p. 61)

Key Terms revenue expense withdrawal

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner United Parcel Service (UPS) has thousands of shareholders who expect a return on their investment in the business. The most common way for a business to provide a return is by selling goods or providing services. UPS earns revenue by providing a global delivery service. To provide the delivery service, UPS incurs expenses like salaries, transportation, and insurance. In this section you will learn about revenue and expense transactions as well as owner’s withdrawals.

Revenue and Expense Transactions What Are Revenue and Expenses? Income earned from the sale of goods or services is called revenue . Examples of revenue are fees earned for services performed and cash received from the sale of merchandise. Revenue increases owner’s equity because it increases the assets of the business. Both revenues and investments by the owner increase owner’s equity, but these represent very different transactions: • •

Revenue is income from the sale of goods and services. Investment by the owner is the dollar amount contributed to the business by the owner.

To generate revenue most businesses must also incur expenses to buy goods, materials, and services. An expense is the cost of products or services used to operate a business. Examples of business expenses are • • •

rent, utilities, and advertising.

Expenses decrease owner’s equity because they decrease the assets of the business or increase liabilities. The effects of revenue and expenses are summarized as follows: • •

60

Revenue increases assets and increases owner’s equity. Expenses decrease assets and decrease owner’s equity or increase liabilities and decrease owner’s equity.

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 60

9/13/05 4:39:19 PM

B u s i n e s s Tr a n s a c t i o n 8 Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services. ANALYSIS

1. Roadrunner received cash, so Cash in Bank is affected. The payment received is revenue. Revenue increases owner’s equity, so Maria Sanchez, Capital is also affected. 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s equity account. 3. Cash in Bank is increased by $1,200. Maria Sanchez, Capital is also increased by $1,200. 4. The accounting equation remains in balance.

Identify

Classify / Balance

Assets Cash in Bank


Liabilities  Owner’s Equity

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

Accounts Payable

Maria Sanchez, Capital

Prev. Bal. $21,850 Trans. 8 1,200

$0

$3,000

$200

$12,000

$11,650

$25,400 1,200

Balance

$0

$23,050 



$3,000



$200

 $12,000
$11,650 

$26,600

B u s i n e s s Tr a n s a c t i o n 9 Roadrunner wrote a check for $700 to pay the rent for the month. ANALYSIS

Identify

Classify / Balance

1. Roadrunner pays rent for use of building space. Rent is an expense. Expenses decrease owner’s equity, so the account Maria Sanchez, Capital is affected. The business is paying cash for the use of the building, so Cash in Bank is affected. 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is an asset account. 3. Maria Sanchez, Capital is decreased by $700. Cash in Bank is decreased by $700. 4. The accounting equation remains in balance.

Assets Cash in Bank


Liabilities  Owner's Equity

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

Accounts Payable

Maria Sanchez, Capital

Prev. Bal. $23,050 Trans. 9 700

$0

$3,000

$200

$12,000

$11,650

$26,600 700

Balance

$0

$22,350 



$3,000



$200

 $12,000
$11,650 

$25,900

Withdrawals by the Owner What Is a Withdrawal? If a business earns revenue, the owner will take cash or other assets from the business for personal use. This transaction is called a Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner

048-075_CH03_868829.indd 61

61

9/13/05 4:39:56 PM

AS YOU

withdrawal . Withdrawals and investments have opposite effects. A withdrawal decreases both assets and owner’s equity. A withdrawal is not the same as an expense. Both decrease owner’s equity, but each represents a different transaction. An expense is the price paid for goods and services used to operate a business. For example, a gardening service purchases fertilizer and lawncare supplies to conduct daily operations. Withdrawals by the owner are cash or other assets taken from the business for the owner’s personal use. Transaction 10 illustrates the impact of a withdrawal on the accounting equation.

READ

In Your Own Words Withdrawal Explain how a withdrawal decreases owner’s equity.

B u s i n e s s Tr a n s a c t i o n 1 0 Maria Sanchez withdrew $500 from the business for her personal use. ANALYSIS

1. A withdrawal decreases the owner’s claim to the assets of the business, so Maria Sanchez, Capital is affected. Cash is paid out, so the Cash in Bank account is affected. 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is an asset account. 3. Maria Sanchez, Capital is decreased by $500. Cash in Bank is decreased by $500. 4. The accounting equation remains in balance.

Identify

Classify / Balance

Assets Cash in Bank


Liabilities  Owner’s Equity

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

Accounts Payable

Maria Sanchez, Capital

Prev. Bal. $22,350 Trans. 10 500

$0

$3,000

$200

$12,000

$11,650

$25,900 500

Balance

$0

$21,850 



$3,000



$200

 $12,000
$11,650 

$25,400

The following summarizes the transactions of this chapter. Can you describe what is happening in each line?

Cash in Bank Prev. Bal. 0 Trans. 1 25,000 Trans. 2 Trans. 3 3,000 Trans. 4 Trans. 5 Trans. 6 350 Trans. 7 200 Trans. 8 1,200 Trans. 9 700 Trans. 10 500 Balance 62

Accounts Receivable

Computer Equipment

Office Equipment

0

0

0

Delivery Accounts Owner’s Equipment
Payable  Equity 0

0

12,000

12,000

400

0 25,000 400

3,000 200

200 350

200

$21,850  $0

1,200 700 500 

$3,000



$200

 $12,000
$11,650  $25,400

Chapter 3 Business Transactions and the Accounting Equation

048-075_CH03_868829.indd 62

9/13/05 4:39:59 PM

Assessment

SECTION 3 AFTER YOU

READ

Reinforce the Main Idea Use a table like the one shown here to describe four transactions of a home decorating business. Indicate how each transaction affects owner’s equity.

4YPEOF4RANSACTION

4RANSACTION$ESCRIPTION

$OES/WNERS%QUITY )NCREASEOR$ECREASE

2EVENUE %XPENSE )NVESTMENT 7ITHDRAWAL

Do the Math Determine the Cash in Bank balance for Wiemack Landscape Designs after the third transaction that follows. All three transactions occurred on the same day. The Cash in Bank balance before the first transaction was $10,000. 1. John Wiemack, the owner, withdrew $1,000 from personal savings and deposited that amount in the business checking account. 2. Purchased computer equipment for $5,000; issued a check for 20 percent of the price and agreed to pay the balance at a later date. 3. Issued a check for $100 to buy tools.

Problem 3–3 Determining the Effect of Transactions on the Accounting Equation Instructions Use the accounts of WordService to analyze these business transactions. The beginning balance for each account is shown following the account name.

Assets Cash in Bank, $24,000 Accounts Receivable, $700 Computer Equipment, $4,000 Office Equipment, $5,000




Liabilities Accounts Payable $3,000



Owner’s Equity Jan Swift, Capital $30,700

On the form provided in your working papers, identify the accounts affected by each transaction and the amount of the increase or decrease for each account. Make sure the accounting equation is in balance after each transaction. 1. Paid $50 for advertising in the local newspaper. 2. Received $1,000 as payment for preparing a report. 3. Wrote a $600 check for the month’s rent. 4. Jan Swift withdrew $800 for her personal use. 5. Received $200 on account from the person who had purchased the old office furniture. Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner

048-075_CH03_868829.indd 63

63

9/13/05 4:40:01 PM

Summary

CH A P T ER 3 Key Concepts

1. Property is anything of value that a person or business owns and therefore controls. Property is measured in dollars. In accounting, property appears in the records at the amount it cost the owner. Financial claims are the legal rights to property and are also measured in dollars. The relationship between property and financial claims is shown in the following equation: PROPERTY
FINANCIAL CLAIMS 2. As it is used in accounting, the term equities refers to the financial claims on assets (property). The two types of equities in a business are • creditors’ financial claims, called liabilities, and • the owner’s financial claims, called owner’s equity. 3. The accounting equation is ASSETS
LIABILITIES  OWNER’S EQUITY Property




Financial Claims

ASSETS




LIABILITIES



OWNER’S EQUITY

Items of value owned by the business




Financial claims of creditors



Financial claims of owners

4. A business transaction is an economic event that causes a change—either an increase or a decrease—in assets, liabilities, or owner’s equity. The accounting equation remains in balance after each transaction:

Trans. 1 Trans. 2 Balance Trans. 3 Balance

Cash in Bank

Assets Computer Equipment

$15,000

0

$15,000 

0  $3,000

$15,000 

$3,000  $18,600

64


Liabilities  Owner’s Equity

Office Equipment 0 $600 $600
$600


Serge Toblek, Capital 0 0  $3,000 $3,000 

$15,000 $600 $15,600 $15,600

$18,600

Chapter 3 Summary

048-075_CH03_868829.indd 64

9/13/05 4:40:04 PM

Summary

CHAPT E R 3

The following table shows the effects of typical business transactions on the parts of the accounting equation. Transaction

Assets

Investment of cash by owner Investment of property Cash payment for office equipment Purchase of an asset on account Sale of office equipment on account Make a payment on account Record revenue from a cash sale Record a cash payment for an expense Record a cash withdrawal by the owner

Effects On: Liabilities Owner’s Equity

 

 

, 



,  

 









5. Use the following steps to analyze a business transaction: ANALYSIS

Identify Classify / Balance

1. Identify the accounts affected. 2. Classify the accounts affected. 3. Determine the amount of increase or decrease for each account affected. 4. Make sure the accounting equation remains in balance.

Key Terms account

(p. 54)

expense

(p. 60)

accounting equation

(p. 52)

financial claim

(p. 50)

accounts payable

(p. 55)

investment

(p. 55)

accounts receivable

(p. 54)

liabilities

(p. 52)

assets

(p. 51)

on account

(p. 57)

business transaction

(p. 54)

owner’s equity

(p. 52)

credit

(p. 51)

property

(p. 50)

creditor

(p. 51)

revenue

(p. 60)

equities

(p. 52)

withdrawal

(p. 62)

Chapter 3 Summary

048-075_CH03_868829.indd 65

65

9/13/05 4:40:06 PM

C H A P T ER 3 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

Property and Financial Claims a. Define the terms property and financial claim. b. What is the relationship between property and financial claims? Equities a. Describe the relationship between assets and equities. b. Name the two types of equities in a business, and give an example of an account that is used for each type. The Accounting Equation a. What is the accounting equation? b. Give an example of an account for each part of the accounting equation. Effects of Transactions a. What is a business transaction? b. How does each of the following transactions affect the three parts of the accounting equation? Trans. 1: Owner transferred cash from personal savings account to the business. Trans. 2: Owner withdrew cash from the business for personal use. Trans. 3: Purchased equipment for cash. Trans. 4: Purchased equipment on credit. Trans. 5: Issued a check for the first monthly payment for equipment purchased in Transaction 4. Trans. 6: Received payment on the date of service for design consulting. Trans. 7: Issued a check to pay the telephone bill. Accounting Equation in Balance a. At least how many accounts must be affected by each business transaction? Why? b. Describe the four-step process described in this chapter used to analyze business transactions.

Apply Key Terms Which of the following terms can be considered assets? Which terms relate to liabilities? Which terms do not fall easily into either category? accounts payable accounts receivable credit creditor expense

66

investment on account property revenue withdrawal

Chapter 3 Review and Activities

048-075_CH03_868829.indd 66

9/13/05 4:40:08 PM

Computerized Accounting

CHAPT E R 3

Exploring Electronic Spreadsheets Computer spreadsheets are important tools for organizing and analyzing data. A spreadsheet is made up of rows and columns. The columns are identified by letters and the rows are identified by numbers. As you create a spreadsheet, you will enter numbers, labels, and formulas into cells. Microsoft® Excel® is the most commonly used spreadsheet application in the business world. The following is an example of a basic electronic spreadsheet:

2

1 A 1 2

Sales

3

Expenses

4

Net income

5

6 B

C

D

E

F

G

H

Jan

Feb

March

April

May

June

July

2,500

5,000

1,650

10,000

3,100

8,200

12,500

700

1,200

225

3,550

1,800

2,300

5,600

1,800

3,800

1,425

6,450

1,300

5,900

6,900

▲

5 6

▼

3

4

7

8

Before you create a computer spreadsheet, review the following spreadsheet terms.

Spreadsheet Terms

Description

➀

Row

➁

Column

➂

Cell address

➃

Active cell

➄

Scroll arrows

➅

Labels

Text that identifies columns or rows of information; cannot be used for calculations.

➆

Values

Numbers inserted in cells that can be used for calculations.

➇

Formulas

Identified by numbers down the left side of the spreadsheet. Identified by letters along the top of the spreadsheet. Identified by a column letter and row number. For example, the cell address B4 indicates the cell where the number 1,800 is found. Indicated by a dark border. Allows you to view other parts of the spreadsheet.

Mathematical functions entered in a particular cell that tells the software to add, subtract, divide, or multiply values. For example, E2  E3 represents 10,000  3,550, or 6,450

Chapter 3 Computerized Accounting

048-075_CH03_868829.indd 67

67

9/13/05 4:40:18 PM

Problems

C H A P T ER 3 Complete problems using:

Manual Glencoe Spreadsheet Spreadshee OR Templates Working Papers

Problem 3–4 Classifying Accounts All accounts belong in one of the following classifications: Asset, Liability, Owner’s Equity.

Instructions In your working papers, indicate the classification for each of the following accounts. 1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

John Jones, Capital Cash in Bank Accounts Receivable Accounts Payable Office Equipment

Analyze

Delivery Equipment Camping Equipment Building Land Computer Equipment

Identify the accounts that represent financial claims to property.

Problem 3–5 Completing the Accounting Equation A business owned and operated by Mike Murray uses these accounts.

Instructions Look at the following list of accounts, and determine the missing amount for each of the question marks.

Assets Cash in Bank Accounts Receivable Office Equipment


$4,500 1,350 5,000

Liabilities

 Owner’s Equity

Accounts Payable ?

Mike Murray, Capital $9,250

?

Analyze

Predict what would happen to owner’s equity if this business paid all of its bills today.

Problem 3–6 Classifying Accounts Within the Accounting Equation Listed here are the account names and balances for Wilderness Rentals. Accounts Payable $ 7,000 Accounts Receivable 2,000 Camping Equipment 12,000

Cash in Bank $ 5,000 Office Equipment 3,000 Ronald Hicks, Capital 15,000

Instructions Using these account names and balances: 1. List and total the assets of the business. 2. Determine the amount owed by the business. 3. Give the amount of the owner’s equity in the business.

Analyze

68

Design a diagram that shows the accounting equation for Wilderness Rentals.

Chapter 3 Problems

048-075_CH03_868829.indd 68

9/13/05 4:40:21 PM

Problems

CHAPT E R 3

Problem 3–7 Determining Increases and Decreases in Accounts Hot Suds Car Wash uses the following accounts:

Assets Cash in Bank Accounts Receivable Office Equipment Office Furniture Car Wash Equipment




Liabilities

 Owner’s Equity

Accounts Payable

Regina Delgado, Capital

Instructions Use a form similar to the one that follows. For each transaction: 1. Identify the accounts affected. 2. Classify the accounts. 3. Determine the amount of the increase () or decrease () for each account affected. The first transaction is completed as an example.

Trans. 1.

Date

Jan.

Accounts Amount of Increase () Affected Classification or Decrease () Cash in Bank

Asset

$25,000

Regina Delgado, Capital

Owner’s Equity

$25,000

Transactions

1 4 5 10 12 15 20 25

Analyze

1. Regina Delgado, the owner, invested $25,000 cash in the business. 2. Bought car wash equipment with cash for $12,000. 3. Purchased, on account, $2,500 of office equipment. 4. Wrote a check for the monthly rent, $800. 5. Received cash for services performed, $1,000. 6. The owner withdrew $600 cash from the business for personal use. 7. Purchased a desk for $1,000, paying $200 cash and agreeing to pay the balance of $800 in 30 days. 8. Provided services worth $600 on account. Identify the transaction that affects the most accounts.

Chapter 3 Problems

048-075_CH03_868829.indd 69

69

9/13/05 4:40:24 PM

Problems

C H A P T ER 3

Problem 3–8 Determining the Effects of Transactions on the Accounting Equation After graduating from college, Abe Shultz decided to start a pet grooming service called Kits & Pups Grooming.

Instructions Use a form similar to the one that follows. For each of the following transactions: 1. Identify the accounts affected, using the account names on the form. 2. Determine the amount of the increase or decrease for each account. 3. Write the amount of the increase () or decrease () in the space under each account affected. 4. On the following line, write the new balance for each account. 5. Transaction 1 is completed as an example.

Owner’s
Liabilities  Equity

Assets Trans. Cash in Bank 1




Accounts Payable



$10,000

Date

Jan.

Accts. Office Grooming Rec. Equip. Equip.

Abe Shultz, Capital $10,000

Transactions

2

3 8 9 15 21 29

Analyze

1. Abe Shultz began the business by depositing $10,000 in a checking account at the Shoreline National Bank in the name of the business, Kits & Pups Grooming. 2. Bought grooming equipment for cash, $1,000. 3. Issued a check for $900 for the monthly rent. 4. Bought $6,000 worth of new office equipment on account for use in the business. 5. Received $700 cash for services performed for customers during the first week of business. 6. Issued a $2,000 check to the creditor as partial payment for the office equipment purchased on account. 7. Performed grooming services and agreed to be paid for them later, $500. Explain the difference between Transaction 5 and Transaction 7.

Problem 3–9 Determining the Effects of Transactions on the Accounting Equation Juanita Ortega is the owner of a professional guide service called Outback Guide Service. 70

Chapter 3 Problems

048-075_CH03_868829.indd 70

9/13/05 4:40:26 PM

Problems

CHAPT E R 3

Instructions Use a form similar to the one below. Complete these steps for each of the following transactions: 1. Identify the accounts affected. 2. Write the amount of the increase () or decrease () in the space provided on the form in your working papers. 3. Determine the new balance for each account.

Assets

Owner’s
Liabilities  Equity

Trans. Cash in Accts. Hiking Rafting Office Bank Rec. Equip. Equip. Equip.


Date

Jan.

Accounts Payable



Juanita Ortega, Capital

Transactions

3 6 8 9 11 15 18 21 26 30

Analyze

1. Ms. Ortega, the owner, opened a checking account for the business by depositing $60,000 of her personal funds. 2. Paid by check the monthly rent of $3,000. 3. Bought hiking equipment for the business by writing a check for $3,000. 4. Purchased $24,000 of rafting equipment by writing a check. 5. Purchased office equipment on account for $4,000. 6. Received payment for guide services, $2,500. 7. Ms. Ortega contributed a desk valued at $450 to the business. 8. Withdrew $3,000 cash from the business for personal use. 9. Wrote a check to a creditor as partial payment on account, $1,500. 10. Took a group on a tour and agreed to accept payment later, $1,200.

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 3–9 1. Select the spreadsheet template for Problem 3–9. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Calculate the amount owed to creditors after Transaction 10.

Problem 3–10 Describing Business Transactions Showbiz Video is a business owned by Greg Failla. The transactions that follow are shown as they would appear in the accounting equation.

Instructions In your working papers, describe what has happened in each transaction. Transaction 1 is completed as an example. Example: 1. The owner invested $30,000 in the business.

CONTINUE

Chapter 3 Problems

048-075_CH03_868829.indd 71

71

9/13/05 4:40:28 PM

Problems

C H A P T ER 3

Owner’s
Liabilities  Equity

Assets Trans. Cash in Bank

Accts. Rec.

1

$30,000

2

$ 2,000

Office Equip.

Accounts Payable



$ 8,000

700

$

$ 500

6

$ 200 $ 3,000

8

Greg Failla, Capital

$ 2,000 $ 8,000

5 7




$30,000

3 4

Video Equip.

$

700

$

500

$

200

$ 3,000 $ 200 $ 200

9

$

10

$ 1,000

500 $ 500

Analyze

$ 1,000

Calculate the balance of the account, Greg Failla, Capital.

Problem 3–11 Completing the Accounting Equation

CHALLENGE PROBLEM

The account names and balances for Job Connect are listed below.

Instructions Determine the missing amount for each of the question marks. Use the form in your working papers and write in the missing amounts.

Assets Trans. Cash in Accounts Business Bank Receivable Equipment 1

?

$ 2,000

2

$ 3,000

3

$ 8,000

4


Liabilities 

Owner’s Equity

Accounts Payable

Richard Tang, Capital






$ 1,000

$ 500

$ 7,500

$ 9,000

?

$ 2,000

$16,000

$ 1,000

$10,000

?

$15,000

$ 4,000

?

$ 4,000

$ 1,000

$17,000

5

$ 9,000

$ 7,000

$ 6,000

$ 5,000

?

6

$10,000

$14,000

?

$ 6,000

$32,000

7

$ 6,000

$ 4,000

$10,000

?

$15,000

8

?

$ 5,000

$ 9,000

$ 1,000

?

Hint: In line 8, total assets are $18,000.

Analyze

72

Explain the mathematical operations used to solve for the accounting equation.

Chapter 3 Problems

048-075_CH03_868829.indd 72

9/13/05 4:40:29 PM

Winning Competitive Events

CHAPTER 3

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Things of value a business uses to generate income are known as a. assets. c. expenses. b. capital. d. revenue.

Business Professionals of America MULTIPLE CHOICE 2. If a customer sends in a payment on his account owed, which of the following statements is true? a. One asset increases and another asset decreases. b. One asset increases and one liability decreases. c. One liability decreases and owner’s equity increases. d. One liability increases and owner’s equity increases. 3. Use these account balances to complete the next two questions: Cash in Bank $3,200.00 Amy Smith, Capital $6,200.00 Accounts Receivable ? Amy Smith, Drawing 1,000.00 Office Supplies 300.00 Boarding Revenue 1,400.00 Office Furniture 1,200.00 Grooming Revenue ? Office Equipment 1,800.00 Salaries Expense 300.00 Accounts Payable ? Miscellaneous Expense 200.00 If the balance in Accounts Payable is $2,000.00 and Grooming Revenue is $400.00, what is the correct balance for the Accounts Receivable account? a. $800.00 c. $2,000.00 b. $1,500.00 d. $2,500.00 4. Use the above table in #3 to answer this question. If the Accounts Receivable balance is $800.00 and Grooming Revenue is $600.00, what is the balance in the Accounts Payable account? a. $600.00 c. $1,200.00 b. $800.00 d. $2,000.00 5. If owner’s equity is $25,500, and assets are $37,600, liabilities are a. $25,500. b. $37,600. Need More Help? c. $63,100. d. $12,100. Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 3. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

048-075_CH03_868829.indd 73

Chapter 3 Winning Competitive Events

73

10/13/05 7:02:04 PM

C H A P T ER 3 Critical Thinking

The Accounting Equation

CASE

STUDY

Service Business: Health and Fitness

ETHICS

Company Property

$ )) Communicating ACCOUNTING

Writing a Tip Sheet

a mattoefr

))

74

Real-World Applications and Connections

1. What term identifies the owner’s claims to assets of the business? 2. Does owner’s equity increase every time a business acquires a new asset? Explain your answer. 3. You are analyzing transactions when you have to answer the telephone. After you finish the conversation, how can you tell whether you completed the transaction you were working on when the phone rang? 4. How is an expense similar to a withdrawal? How is it different? 5. Describe a series of transactions that could result in negative owner’s equity. 6. Assess the value of the four-step procedure for analyzing transactions. The Fitness Center, owned by Gail Chan, has been in business for two years. The business is successful with its expanded hours of operation. You are a local business consultant and have worked with several other small businesses in the area. Ms. Chan has asked you about possible ways to obtain money for new equipment. She has already borrowed money from family members and cannot use them as a source of more funds. INSTRUCTIONS 1. Evaluate possible sources of money for your client. Use the Internet and other sources to research alternatives with the Small Business Administration, the Chamber of Commerce, and local banks. 2. Make a list of alternatives. Include costs, interest rates, and advantages or disadvantages. 3. Make a recommendation to your client based on your list of alternatives. 4. Explain how the additional money will affect the accounting equation. Many companies provide office supplies for their employees’ use while on the job. Imagine that you work for a large department store like JC Penney. Several of your co-workers take company supplies home for their personal use, such as pens, bags, hangers, and boxes. You need boxes to store some items at home, so you consider taking them from the supply room. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Using the four-step approach to transaction analysis, write a “tip sheet” to help a new employee remember the steps. Write a brief explanation and give an example of each step in the analysis. Create a business transaction to use in your explanation.

Chapter 3 Real-World Applications and Connections

048-075_CH03_868829.indd 74

9/13/05 4:40:33 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

C HAPT E R 3

Applying Technology Whether you work in a small or large business, technology is critical to efficiency in the workplace. ON THE JOB After graduating from college and working for a year as a junior accountant in a CPA firm, you decide to open an accounting business from your home. You’ll need a computer, software, and office furniture to get started. Complete the activities below to help you select the right software for your needs. INSTRUCTIONS 1. List the kinds of financial services you would like to provide. 2. Research three accounting software packages that would help you deliver the services you listed. List the name, price, system requirements, and features of each software package. Use the Internet and other sources. 3. Select the software package that best meets your anticipated needs. Write a paragraph explaining why you selected this product.

Money Around the World If you were on vacation in Mexico, you would pay for your lunch in pesos. Just as different countries use different languages, they also use their own type of money or currency. Many countries in Europe use the euro. India uses the rupee, and China uses the yuan. If you were an accountant recording business transactions in Switzerland, you would use Swiss francs. INSTRUCTIONS Find a Web site on the Internet that lists world currencies. What currency is used in Japan? In the United Kingdom?

Your Earning Power Your future income will depend on various things including your career choice, your education, and the region where you live. PERSONAL FINANCE ACTIVITY List three jobs that are in different fields and different regions of the United States. Use the Internet or your library to research their education requirements and their salary ranges. Create a table to organize the results of your research. Sports Property PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and Like many industries, a professional sport can have assets that are click on Student Center. Click on Making It unique to its type of business. Visit Personal and select Chapter 3. glencoeaccounting .glencoe.com and click on Student Center. Click on WebQuest and select Unit 2 to continue your Internet project.

glencoeaccounting.glencoe.com

048-075_CH03_868829.indd 75

Chapter 3 Real-World Applications and Connections

75

4/6/06 5:33:27 PM

CH A P T ER 4

Transactions That Affect Assets, Liabilities, and Owner’s Capital

What You’ll Learn 1.

Prepare a chart of accounts.

2.

Explain the purpose of double-entry accounting.

3.

Identify the normal balance of accounts.

4.

Use T accounts to illustrate the rules of debit and credit for asset accounts, liability accounts, and the owner’s capital account and to express the accounting equation.

5.

6.

7.

Use T accounts to analyze transactions that affect assets, liabilities, and the owner’s capital account. Calculate the account balances after recording business transactions. Define the accounting terms introduced in this chapter.

Why It’s Important ▲

In accounting you need to analyze transactions into debit and credit parts.

BEFORE YOU

READ

Predict 1. 2. 3. 4.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING BUSINESS TRANSACTIONS

Panda Restaurant Group When you think of a quick meal, do you think of Orange Flavored Chicken and Beef with Broccoli? These are two of the Chinese food entrées that Panda Express serves quickly and conveniently. Panda Express is part of the Panda Restaurant Group, owner of Panda Inn and Hibachi-San restaurants. Andrew and Peggy Cherng opened their first Panda Inn in Pasadena, California, using recipes from Andrew’s father, Master Chef Ming-Tsai Cherng. Panda Restaurant Group now has more than 700 stores in 36 states, Puerto Rico, and Japan. The Cherngs are on a mission to reach a goal of 10,000 Panda Express restaurants. This means finding new locations and buying a lot of kitchen equipment and dining room furniture.

What Do You Think? When Panda Restaurant Group opens a new store, how do you think its assets and liabilities are affected?

76

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 76

8/29/05 1:03:28 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Business transactions occur around us every day. A music store sells thousands of CDs. You may stop by for a meal at a local restaurant. A cruise ship line may buy new furniture for its dining cabins. Successful businesses have hundreds, even thousands, of transactions each day. Analyzing and recording these transactions are key duties of the accounting staff.

Personal Connection 1. What types of business transactions occur in your workplace or the workplace of your family or friends? 2. Who records these transactions into the accounting records?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 4.

glencoeaccounting.glencoe.com

076-101_CH04_868829.indd 77

77

8/29/05 1:03:47 PM

SECTION 1

BEFORE YOU

Accounts and the DoubleEntry Accounting System In Chapter 3 you learned about the accounting equation. In this chapter you will learn how to keep it in balance using the doubleentry accounting system. When The Coca-Cola Company records the dollar amount of a transaction in one account, it records an equal amount in another account. The same is true of a small barbershop. In this and following chapters, we discuss accounting for a sole proprietorship.

READ

Main Idea

The double-entry accounting system uses debits and credits. Debit means “left side” and credit means “right side.”

Read to Learn… ➤ about the chart of

accounts. (p. 78) ➤ about the double-entry accounting system. (p. 78)

Key Terms

chart of accounts ledger double-entry accounting debit credit T account normal balance

The Chart of Accounts How Is the Chart of Accounts Organized? A chart of accounts is a list of all accounts used by a business. A small business may require only 20 or 30 accounts, but a large one may have several thousand. Recall that an account is a record of changes and balances of a specific asset, liability, or component of owner’s equity. Accounts may have different physical forms, depending on the system. In a manual system, each account may be a separate page in a book or a separate card in a tray. In an electronic system, accounts are stored on disks or hard drives. Whether a system is manual or electronic, accounts are grouped together in a ledger . The ledger is often referred to as the general ledger. “Keeping the books” refers to maintaining accounts in the ledger. Grouping accounts in a ledger makes information easy to find. Information is taken from the ledger and organized into financial statements. A system for numbering accounts makes it easy to locate individual accounts in the ledger. Account numbers have two or more digits used for sorting information based on the kinds of reports the business needs. A small company may use a three-digit system. A very large corporation may use 35 or more digits. A typical numbering system used to prepare a chart of accounts is as follows: • • • • •

Asset accounts begin with 1. Liability accounts begin with 2. Owner’s equity accounts begin with 3. Revenue accounts begin with 4. Expense accounts begin with 5.

Double-Entry Accounting How Does Double-Entry Accounting Work? In Chapter 3 you used the accounting equation for analyzing and recording changes in account balances. This approach works well if a

78

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 78

8/29/05 1:03:57 PM

CHART OF ACCOUNTS ASSETS 101 Cash in Bank 105 110 115 120 125

Accounts Receivable—City News Accounts Receivable—Green Company Computer Equipment Office Equipment Delivery Equipment

LIABILITIES 201 Accounts Payable—Beacon Advertising 205 Accounts Payable—North Shore Auto

OWNER’S EQUITY 301 Maria Sanchez, Capital

302 Maria Sanchez, Withdrawals 303 Income Summary

REVENUE 401 Delivery Revenue EXPENSES 501 Advertising Expense

505 Maintenance Expense 510 Rent Expense 515 Utilities Expense

business has only a few accounts. It becomes awkward, however, if a business has many accounts and many transactions to analyze. Accountants use the double-entry accounting system to analyze and record a transaction. Double-entry accounting recognizes the different sides of business transactions as debits and credits. A debit is an entry on the left side of an account. A credit is an entry on the right side of an account. This system is more efficient than updating the accounting equation for each transaction.

AS YOU

T Accounts An efficient tool for using double-entry accounting is a T account. The T account , so called because of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction. T accounts help the accountant analyze the parts of a business transaction. As in the illustration here, a T account has an account name, a left side, and a right side. The account name is at the top of the T. The left side of T accounts is always used for debit amounts. Account Name The right side of T accounts is always used Left Side Right Side for credit amounts. The words debit and Debit Side credit are simply the accountant’s terms Credit Side for left and right. Accountants sometimes Debit Credit use DR for debit and CR for credit.

READ

In Your Experience Chart of Accounts A chart of accounts is organized as a table. What other tables have you worked with?

The Rules of Debit and Credit Debits and credits are used to record the increase or decrease in each account affected by a business transaction. Under double-entry accounting, for each debit entry made in one account, a credit of an equal amount must be made in another account. Debit and credit rules vary according to whether an account is classified as an asset, a liability, or the owner’s capital

Section 1 Accounts and the Double-Entry Accounting System

076-101_CH04_868829.indd 79

79

8/29/05 1:04:00 PM

AS YOU

READ

It’s Not What It Seems Debit and Credit The terms debit and credit might remind you of debit cards and credit cards. In accounting debit simply means the left side of an account and credit means the right side.

account. Regardless of the type of account, however, the left side of an account is always the debit side and the right side is always the credit side. Each account classification has a specific side that is its normal balance side. An account’s normal balance is always on the side used to record increases to the account. The word normal used here means usual. Throughout this book, note that the normal balance side of each account is shaded. Rules for Asset Accounts. Asset accounts follow three rules of debit and credit: 1. An asset account is increased (
) on the debit side (left side). 2. An asset account is decreased () on the credit side (right side). 3. The normal balance for an asset account is the increase, or the debit side. The normal balance side is shaded in the following T account. Notice that assets appear on the left side of the accounting equation. ASSETS  LIABILITIES
OWNER’S EQUITY Asset Accounts Debit
(1) Increase Side (3) Normal Balance

CULTURAL Diversity Business Practices

Giving business gifts internationally can be tricky. Some cultures attach meaning to certain gifts and colors. For example, in Japan, white chrysanthemums are used only for funerals.

80

Credit  (2) Decrease Side

For asset accounts the increase side is the debit (left) side of the T account. The decrease side is the credit (right) side of the T account. Notice the (
) and () signs that are used to indicate the increase and decrease sides of the account. They do not mean the same thing as debit and credit. Since the increase side of an asset account is always the debit side, asset accounts have a normal debit balance. For example, in the normal course of business, total increases to assets are larger than or exceed total decreases. You would expect an asset account, then, Cash in Bank to have a normal debit balance. Debit Credit Let’s apply these rules to an actual
 asset account. Look at the entries in the 200 70 T account for Cash in Bank shown here. 150 40 350 110 The increases in the account are recorded Bal. 240 on the left, or debit, side. The decreases in the account are recorded on the right, or credit, side. Total debits equal $350 ($200
$150). Total credits equal $110 ($70
$40). To find the balance, subtract total credits from total debits ($350  $110). The debit balance is $240. Rules for Liability and Owner’s Capital Accounts. The rules of debit and credit for liability and the owner’s capital account are: 1. Liability and owner’s capital accounts are increased on the credit (right) side. 2. Liability and owner’s capital accounts are decreased on the debit (left) side. 3. The normal balance for liability and owner’s capital accounts is the increase, or the credit side.

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 80

8/29/05 1:04:02 PM

To illustrate these rules, let’s look again at the accounting equation and the T accounts. Remember, the normal balance side is shaded. Assets Debit
Increase Side

Liabilities

 Credit  Decrease Side

Debit  (2) Decrease Side

Normal Balance




Credit
(1) Increase Side

Owner’s Equity Debit  (2) Decrease Side

(3) Normal Balance

For all three types of accounts, the debit side is always the left side of the T account, and the credit side is always the right side. Notice, however, that the increase (
) and decrease () sides of the liability and owner’s capital accounts are the opposite of those for assets. This difference exists because accounts classified as liabilities and owner’s capital are on the opposite side of the accounting equation from accounts classified as assets. As a result, debit and credit rules on one side of the accounting equation—and the T accounts within it—are mirror images of those on the other side. Let’s apply these rules to actual accounts. First, look at the entries in the T account below for the liability account Accounts Payable. Increases are recorded on the right, or credit, side. The decreases are recorded on the left, or debit, side. Total credits equal $375 ($200
$175); total debits equal $175 ($100
$75). To find the balance, subtract the total debits from the total credits ($375  $175). The credit balance is $200.

Credit
(1) Increase Side (3) Normal Balance

AS YOU

READ

Key Point Debit and Credit Debit and credit are neutral terms that have no relation to “good” and “bad.” Debit means “left side” and credit means “right side.”

Accounts Payable Debit  100 75 175

Credit
200 175 375 Bal. 200

Now look at the entries in the T account for the owner’s equity account Maria Sanchez, Capital. Remember that the rules of debit and credit for the capital account are the same as those for a liability account. Increases to owner’s capital are recorded on the right, or credit, side of the account. Decreases are recorded on the left, or debit, side. The capital account has a normal credit balance. If you subtract the total debits from the total credits ($4,000  $550), you have a credit balance of $3,450. Maria Sanchez, Capital Debit  350 200 550

Credit
1,500 2,500 4,000 Bal. 3,450

Section 1 Accounts and the Double-Entry Accounting System

076-101_CH04_868829.indd 81

81

8/29/05 1:04:03 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to summarize the rules of debit and credit. Fill in each blank box with the word debit or the word credit.

!SSET!CCOUNTS

,IABILITY!CCOUNTS

/WNERS#APITAL!CCOUNT

.ORMAL"ALANCE

)NCREASE3IDE

$ECREASE3IDE

Do the Math During the month of December, Poremba Pizza wrote checks totaling $4,800. Two-thirds of this amount was used to purchase a computer for cash. The remaining amount was used to pay an outstanding invoice for kitchen equipment purchased from Restaurant City. 1. List the account(s) debited and the debit amount(s). 2. List the account(s) credited and the credit amount(s).

Problem 4–1 Applying the Rules of Debit and Credit Speedy Appliance Repair, owned by R. Lewis, uses the following accounts: General Ledger Cash in Bank Accounts Receivable Office Equipment Accounts Payable R. Lewis, Capital

Instructions In the form provided in your working papers: 1. 2. 3. 4.

Classify each account as an asset, liability, or owner’s capital account. Indicate whether the increase side is a debit or a credit. Indicate whether the decrease side is a debit or credit. Indicate whether the normal balance for the account is a debit or credit balance.

The Cash in Bank account is completed as an example.

Account Account Name Classification Cash in Bank

82

Asset

Increase Side

Decrease Side

Normal Balance

Debit

Credit

Debit

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 82

8/29/05 1:04:04 PM

Applying the Rules of Debit and Credit

SECTION 2

Now that you are familiar with the rules of debit and credit for asset, liability, and owner’s capital accounts, you can use those rules to analyze business transactions.

Business Transaction Analysis How Do You Analyze Transactions? Whether a business is buying a new computer system, paying its utility bills, or receiving money for sales, the accountant must analyze how the transaction should be recorded. When analyzing business transactions, you should use the following step-by-step method:

BEFORE YOU

READ

Main Idea

Use T accounts to analyze transactions.

Read to Learn…

➤ a step-by-step method for analyzing

transactions. (p. 83) ➤ how to apply the method to asset, liability, and owner’s capital transactions. (p. 83)

B u s i n e s s Tr a n s a c t i o n BUSINESS TRANSACTION ANALYSIS: Steps to Success ANALYSIS

Identify Classify
/

1. Identify the accounts affected. 2. Classify the accounts affected. 3. Determine the amount of increase or decrease for each account affected.

DEBIT-CREDIT RULE

4. Which account is debited? For what amount? 5. Which account is credited? For what amount?

T ACCOUNTS

6. What is the complete entry in T-account form? Account Name

Account Name

Asset and Equities Transactions How Do You Use T Accounts for Assets and Equities? The business transactions that follow are for Roadrunner Delivery Service. Throughout the next several pages, you will learn how to analyze each Section 2 Applying the Rules of Debit and Credit

076-101_CH04_868829.indd 83

83

8/29/05 1:04:22 PM

AS YOU

READ

Instant Recall Property and Financial Claims assets

 property

equities  creditors’ claims
owner’s claim

Roadrunner transaction, apply the rules of debit and credit, and complete the entry in T-account form. The T accounts demonstrate the effects of transactions on the accounting equation. A debit in one account is offset by a credit in another account. Refer to the Roadrunner chart of accounts on page 79. These accounts will be used to analyze several business transactions.

Assets and Owner’s Capital Business Transactions 1 and 2 use T accounts to illustrate owner’s investments in the business.

B u s i n e s s Tr a n s a c t i o n 1 On October 1 Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. ANALYSIS

Identify Classify
/

1. The accounts Cash in Bank and Maria Sanchez, Capital are affected. 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s capital account. 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5. Increases in the owner’s capital account are recorded as credits. Credit Maria Sanchez, Capital for $25,000.

T ACCOUNTS

6.

Cash in Bank

Maria Sanchez, Capital

Debit
25,000

Credit
25,000

B u s i n e s s Tr a n s a c t i o n 2 On October 2 Maria Sanchez took two telephones valued at $200 each from her home and transferred them to the business as office equipment. ANALYSIS

Identify Classify
/

84

1. The accounts Office Equipment and Maria Sanchez, Capital are affected. 2. Office Equipment is an asset account. Maria Sanchez, Capital is an owner’s capital account. 3. Office Equipment is increased by $400. Maria Sanchez, Capital is increased by $400.

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 84

8/29/05 1:04:25 PM

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Office Equipment for $400. 5. Increases in owner’s capital accounts are recorded as credits. Credit Maria Sanchez, Capital for $400.

T ACCOUNTS

6.

Office Equipment

Maria Sanchez, Capital

Debit
400

Credit
400

Assets and Liabilities

AS YOU

The following examples show changes to assets and liabilities in T-account form: • • • • •

Business Transaction 3: Business Transaction 4: Business Transaction 5: Business Transaction 6: Business Transaction 7:

READ

Compare and Contrast

increases an asset and decreases another asset increases an asset and increases a liability increases an asset and decreases another asset decreases a liability and decreases an asset increases an asset and decreases a liability

Transactions How are Business Transactions 2 and 3 similar? How are they different?

B u s i n e s s Tr a n s a c t i o n 3 On October 4 Roadrunner issued Check 101 for $3,000 to buy a computer system. ANALYSIS

Identify Classify
/

1. The accounts Computer Equipment and Cash in Bank are affected. 2. Computer Equipment and Cash in Bank are asset accounts. 3. Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Computer Equipment for $3,000. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $3,000.

T ACCOUNTS

6.

Computer Equipment Debit
3,000

Cash in Bank Credit  3,000

Section 2 Applying the Rules of Debit and Credit

076-101_CH04_868829.indd 85

85

8/29/05 1:04:26 PM

B u s i n e s s Tr a n s a c t i o n 4 On October 9 Roadrunner bought a used truck on account from North Shore Auto for $12,000. ANALYSIS

Identify Classify
/

1. The accounts Delivery Equipment and Accounts Payable—North Shore Auto are affected. 2. Delivery Equipment is an asset account. Accounts Payable—North Shore Auto is a liability account. 3. Delivery Equipment is increased by $12,000. Accounts Payable— North Shore Auto is increased by $12,000.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Delivery Equipment for $12,000. 5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—North Shore Auto for $12,000.

T ACCOUNTS

6. Delivery Equipment

Accounts Payable— North Shore Auto

Debit
12,000

Credit
12,000

B u s i n e s s Tr a n s a c t i o n 5 On October 11 Roadrunner sold one phone on account to Green Company for $200. ANALYSIS

Identify Classify
/

1. The accounts Accounts Receivable—Green Company and Office Equipment are affected. 2. Accounts Receivable—Green Company is an asset account. Office Equipment is also an asset account. 3. Accounts Receivable—Green Company is increased by $200. Office Equipment is decreased by $200.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Accounts Receivable—Green Company for $200. 5. Decreases in asset accounts are recorded as credits. Credit Office Equipment for $200.

T ACCOUNTS

6.

Accounts Receivable— Green Company Debit
200

86

Office Equipment Credit  200

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 86

8/29/05 1:04:33 PM

B u s i n e s s Tr a n s a c t i o n 6 On October 12 Roadrunner mailed Check 102 for $350 as the first installment payment on the truck purchased from North Shore Auto on October 9. ANALYSIS

Identify Classify
/

1. The accounts Accounts Payable—North Shore Auto and Cash in Bank are affected. 2. Accounts Payable—North Shore Auto is a liability account. Cash in Bank is an asset account. 3. Accounts Payable—North Shore Auto is decreased by $350. Cash in Bank is decreased by $350.

DEBIT-CREDIT RULE

4. Decreases in liability accounts are recorded as debits. Debit Accounts Payable—North Shore Auto for $350. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $350.

T ACCOUNTS

6.

Accounts Payable— North Shore Auto

Cash in Bank Credit  350

Debit  350

B u s i n e s s Tr a n s a c t i o n 7 On October 14 Roadrunner received and deposited a check for $200 from Green Company. The check is full payment for the telephone sold on account to Green Company on October 11. ANALYSIS

Identify Classify
/

1. The accounts Cash in Bank and Accounts Receivable—Green Company are affected. 2. Cash in Bank is an asset account. Accounts Receivable—Green Company is an asset account. 3. Cash in Bank is increased by $200. Accounts Receivable—Green Company is decreased by $200.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $200. 5. Decreases in asset accounts are recorded as credits. Credit Accounts Receivable—Green Company for $200.

T ACCOUNTS

6. Cash in Bank Debit
200

Accounts Receivable— Green Company Credit  200

Section 2 Applying the Rules of Debit and Credit

076-101_CH04_868829.indd 87

87

8/29/05 1:04:34 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Imagine that you have your own business. Write a description of a typical transaction your business would have. On a sheet of paper, express the same transaction in T-account form.

Do the Math Diane Hendricks always dreamed of owning a recording studio. On February 1 Diane withdrew $10,000 from personal savings and deposited it in a new business checking account for Hendricks Sound. On February 2 Hendricks Sound made a $2,000 down payment on equipment that cost $8,000. The remaining balance will be paid at a later date. What is the accounting equation for Hendricks Sound after these transactions?

Problem 4–2 Identifying Increases and Decreases in Accounts Alice Roberts uses the following accounts in her business: General Ledger Cash in Bank Accounts Receivable Office Furniture

Office Equipment Accounts Payable Alice Roberts, Capital

Instructions Analyze each of the following transactions. In your working papers, explain the debit and the credit. Use the format shown in the example. Example: On June 2 Alice Roberts invested $5,000 of her own money in a business called Roberts Employment Agency. a. The asset account Cash in Bank is increased. Increases in asset accounts are recorded as debits. b. The owner’s capital account Alice Roberts, Capital is increased. Increases in the owner’s capital account are recorded as credits. Date

June

Transactions

3 9 15

88

1. Purchased a computer on account from Computer Inc. for $2,500. 2. Transferred a desk (Office Furniture) to the business. The desk is worth $750. 3. Made a partial payment on account of $1,000 to Computer Inc.

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

076-101_CH04_868829.indd 88

8/29/05 1:04:35 PM

Accounting Careers in Focus ACCOUNTING PROFESSOR

Francis Marion University, Florence, South Carolina Tim Lowder .. Tips from . Q: Do you have other professional commitments besides teaching at the university? A: Yes, I also work with Winthrop University Small Business Development Center and Florence-Darlington Technical College. I am also a management consultant.

Q: What factors have been key to your success? A: I’ve realized that you can’t put all your faith in the short term. To succeed, you must have a long-term vision and identify what steps you must take to achieve your goals.

Q: What do you like most about your job? A: I like knowing that I’ve left a positive impact on students. As a consultant, I enjoy helping my clients improve their companies. Teaching and consulting are the most rewarding pursuits I’ve ever undertaken.

learn more If you’d like to h, tial career pat about a poten terin formational arrange an in eone already view with som field. You can working in that if d insight and, gain real-worl , n io od impress you make a go be considered you may even vel position for an entry-le . omes available when one bec

Q: What advice do you have for accounting students just beginning their careers? A: Get as broad a background as possible. Accounting is integrated with all the other aspects of business, so you need to gain experience in things such as information systems, marketing, and financial management.

Q: What advice do you have for accounting students who are interested in pursuing your career path? A: No matter what career you choose, you must do something because you love it. Start thinking early about the education and certifications you’ll need.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Create lesson plans and exams, teach classes, advise and motivate students. Training or Education Needed: A master’s or doctoral degree in accounting or a related field. Relevant work experience and certifications can sometimes be substituted for an advanced degree. A CPA license is an example of a certification. Aptitudes, Abilities, and Skills: Time management skills, communication skills, and interpersonal skills. Salary Range: $35,000 to $90,000 depending on experience, size of educational institution, and location. Career Path: Pursue an advanced degree in accounting or a related field, or gain relevant work experience. Then become a graduate teaching assistant or part-time professor.

Thinking Critically

What do you think are the greatest challenges of teaching accounting? Chapter 4 Accounting Careers in Focus

076-101_CH04_868829.indd 89

89

8/30/05 2:52:44 PM

Summary

CH A P T ER 4 Key Concepts

1. A chart of accounts is a list of all accounts that a business uses. Each account is assigned a number, and the accounts are listed in numerical order. 2. Double-entry accounting is a system that recognizes the different sides of business transactions as debits and credits: • debit: an entry on the left side of an account • credit: an entry on the right side of an account This system is more efficient than updating the accounting equation after each transaction, as we did in Chapter 3. 3. An account’s usual balance is called its normal balance. An asset has a normal debit balance: • The increase side is the debit (left) side. • The decrease side is the credit (right) side. Asset Rule:

Asset Accounts Debit Increase Side
Normal Balance

Credit Decrease Side 

Both a liability account and the owner’s capital account each have a normal credit balance: • The increase side is the credit (right) side. • The decrease side is the debit (left) side. Liability and Owner’s Capital Rule:

Liability and Owner’s Capital Accounts Credit Increase Side
Normal Balance

Debit Decrease Side 

4. Use debit and credit rules to record increases and decreases in accounts. Assets Debit
Increase Side

 Credit  Decrease Side

Normal Balance

90

Liabilities Debit  (2) Decrease Side

Credit
(1) Increase Side (3) Normal Balance




Owner’s Equity Debit  (2) Decrease Side

Credit
(1) Increase Side (3) Normal Balance

Chapter 4 Summary

076-101_CH04_868829.indd 90

8/29/05 1:04:40 PM

Summary

CHAPT E R 4

5. Use a six-step method to analyze a transaction:

B u s i n e s s Tr a n s a c t i o n BUSINESS TRANSACTION ANALYSIS: Steps to Success ANALYSIS

Identify Classify
/

1. Identify the accounts affected. 2. Classify the accounts affected. 3. Determine the amount of increase or decrease for each account affected.

DEBIT-CREDIT RULE

4. Which account is debited? For what amount? 5. Which account is credited? For what amount?

T ACCOUNTS

6. What is the complete entry in T-account form? Account Name

Account Name

6. Account balances are calculated by following the rules of debit and credit: Accounts Payable Debit  100 75 175

Credit
200 175 375 Bal. 200

Key Terms chart of accounts

(p. 78)

ledger

(p. 78)

credit

(p. 79)

normal balance

(p. 80)

debit

(p. 79)

T account

(p. 79)

double-entry accounting

(p. 79)

Chapter 4 Summary

076-101_CH04_868829.indd 91

91

8/29/05 1:04:42 PM

C H A P T ER 4 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Chart of Accounts a. What is a chart of accounts? b. Why are the accounts numbered? Double-Entry Accounting a. What is double-entry accounting? b. Define the terms debit and credit. Normal Balances a. What is meant by the term normal balance? b. What is the normal balance for asset accounts? For liability accounts? For the owner’s capital account? T Accounts a. What is the purpose of a T account? b. Name the three basic parts of a T account. Transaction Analysis a. What are the six steps used to analyze a business transaction? b. Explain briefly what is meant by the following phrase: A debit of $100 to Cash in Bank Account Balances a. How do you determine the balance of an account? b. The following information is for the Cash in Bank account on a single day. What is the balance of Cash in Bank at the end of the day? Beginning balance: $3,000 debit Transactions: $450 credit $1,275 credit $1,800 debit

Apply Key Terms Your boss at Hillside Nurseries needs help understanding the double-entry accounting system. Using the key terms listed below, draft a list of definitions and illustrations that would help in your explanation. chart of accounts credit debit double-entry accounting

92

ledger normal balance T account

Chapter 4 Review and Activities

076-101_CH04_868829.indd 92

4/6/06 5:35:04 PM

Computerized Accounting

CHAPT E R 4

Introduction to Computerized Accounting Systems Making the Transition from a Manual to a Computerized System Manual Methods

Computerized Methods

• Transactions are recorded into journals by hand. • The details of each transaction are then posted in the general ledger. • The accountant computes account balances and prepares a trial balance to verify that the accounting equation is still in balance. • Account names and balances are then transferred to the proper financial report and the report is summarized (totaled).

• Transactions are keyed to the appropriate screen in the accounting system. • Posting to the general ledger accounts occurs automatically. • The accounting system generates the trial balance. • Financial reports pull the appropriate accounts and their current balances from the general ledger computer files. The reports automatically summarize and can be printed when the user chooses.

Q&A Peachtree Question

Answer

What types of transactions can be entered in Peachtree Complete® Accounting?

• • • • •

General journal entries Sales and cash receipts Purchases and cash payments Inventory adjustments Payroll entries

What else will Peachtree do for the accountant?

• • • • •

Reconciles bank statements Prepares financial reports automatically Prints checks and invoices Closes the accounting period Creates cash, collections, and payment management charts and graphs

QuickBooks

®

Q&A

QuickBooks Question

Answer

What types of transactions can be entered in QuickBooks® Pro?

• • • • •

General journal entries Sales and cash receipts Purchases and cash payments Inventory adjustments Payroll entries

What else will QuickBooks® do for the accountant?

• • • • •

Reconciles bank statements Prepares financial reports automatically Prints checks and invoices Closes the accounting period Creates sales, collections, and payables charts and graphs

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 4 Computerized Accounting

076-101_CH04_868829.indd 93

93

8/29/05 1:05:01 PM

Problems

C H A P T ER 4 Complete problems using:

Manual Glencoe Spreadsheet Spreadshee OR Templates Working Papers

Problem 4–3 Identifying Accounts Affected by Transactions Ronald Hicks owns Wilderness Rentals and uses the following accounts in his business: General Ledger 101 Cash in Bank 105 Accounts Receivable— Helen Katz 120 Office Equipment 125 Camping Equipment

201 Accounts Payable— Adventure Equipment Inc. 301 Ronald Hicks, Capital

Instructions For each of the following transactions: 1. Indicate the two accounts affected. 2. Indicate whether each account is debited or credited. Date

May 11

19

22

23

Analyze

94

Transactions

1. Sold on account to Helen Katz an unneeded office typewriter. 2. Purchased camping equipment on credit from Adventure Equipment Inc. Payment is due within 30 days. 3. Ronald Hicks brought a filing cabinet from home and transferred it to the business (Office Equipment). 4. Purchased tents and sleeping bags for cash. Identify the transactions that affect the Cash in Bank account.

Chapter 4 Problems

076-101_CH04_868829.indd 94

8/29/05 1:05:03 PM

Problems

CHAPT E R 4

Problem 4–4 Using T Accounts to Analyze Transactions Regina Delgado owns a business called Hot Suds Car Wash. She uses the following accounts: General Ledger 101 Cash in Bank 110 Accounts Receivable— Valley Auto 125 Office Equipment 130 Office Furniture 135 Car Wash Equipment

201 Accounts Payable— Allen Vacuum Systems 301 Regina Delgado, Capital

Instructions For each transaction: 1. Determine which accounts are affected. 2. Prepare T accounts for the accounts affected. 3. Enter the debit and credit amounts in the T accounts. Date

May

Transactions

5 12 17 24 29

Analyze

1. Regina Delgado invested an additional $40,000 cash in her business. 2. Bought another car wash system on account for $27,000 from Allen Vacuum Systems. 3. Regina Delgado transferred some of her personal office furniture, valued at $3,750, to her business. 4. Hot Suds Car Wash purchased additional office equipment for $7,500. Payment was made by check. 5. Hot Suds Car Wash sold some surplus car washing equipment on account to Valley Auto for $1,200. Calculate the ending balance for the liability account Accounts Payable—Allen Vacuum Systems.

Chapter 4 Problems

076-101_CH04_868829.indd 95

95

8/29/05 1:05:10 PM

Problems

C H A P T ER 4

Problem 4–5 Analyzing Transactions into Debit and Credit Parts Abe Shultz owns Kits & Pups Grooming and uses the following accounts: General Ledger 101 Cash in Bank 115 Accounts Receivable— Martha Giles 125 Office Equipment 130 Office Furniture 140 Grooming Equipment

205 Accounts Payable— Dogs & Cats Inc. 301 Abe Shultz, Capital

Instructions For each transaction: 1. In your working papers, prepare a T account for each account listed. 2. Using the appropriate T accounts, analyze and record each of the following business transactions. Identify each transaction by number. 3. After recording all transactions, write the word Balance on the normal balance side of each T account. Then compute and record the balance for each account. Date

May

Transactions

1 5 10 14 19 22 29 31

Analyze

96

1. Abe Shultz invested an additional $45,000 cash in his business. 2. Bought grooming equipment on account from Dogs & Cats Inc. for $8,500. 3. Purchased an office lamp for $85, Check 150. 4. Abe Shultz transferred his personal typewriter, worth $200, to the business. 5. Made a $3,000 payment on the grooming equipment bought on account, Check 151. 6. Sold the typewriter on account to Martha Giles for $200. 7. Bought a photocopier for $1,500, Check 152. 8. Received a $100 payment for the typewriter sold on account. Calculate the total cash spent in the month of May.

Chapter 4 Problems

076-101_CH04_868829.indd 96

8/29/05 1:05:11 PM

Problems Problem 4–6 Analyzing Transactions into Debit and Credit Parts Juanita Ortega runs Outback Guide Service. The accounts she uses to record and report business transactions are listed below. General Ledger 101 Cash in Bank 105 Accounts Receivable— Mary Johnson 130 Office Equipment 140 Computer Equipment 145 Hiking Equipment 150 Rafting Equipment

205 Accounts Payable— Peak Equipment Inc. 207 Accounts Payable— Premier Processors 301 Juanita Ortega, Capital

Instructions For each transaction: 1. In your working papers, prepare a T account for each account. 2. Analyze and record each of the following business transactions in the appropriate T accounts. Identify each transaction by number. 3. After recording all transactions, compute and record the account balance on the normal balance side of each T account. 4. Add the balances of those accounts with normal debit balances. 5. Add the balances of those accounts with normal credit balances. 6. Compare the two totals. Are they the same? Date

May

CHAPT E R 4 SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 4–6 1. Select the spreadsheet template for Problem 4–6. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Transactions

2

6 7 11 16 19 22 24 28 31

Analyze

1. Juanita Ortega transferred an additional $53,250 from her personal savings account into the business checking account. 2. Bought hiking equipment for $550, Check 367. 3. Bought rafting equipment on account from Peak Equipment Inc. for $2,675. 4. Juanita Ortega transferred her own computer, valued at $850, to the business. 5. Bought a cash register for the office on account from Premier Processors for $1,250. 6. Sold the computer on credit for $850 to Mary Johnson. 7. Paid $500 on account to Peak Equipment Inc., Check 368. 8. Purchased shelves for the office for $650, Check 369. 9. Paid $1,250 on account to Premier Processors, Check 370. 10. Bought rafting oars for $175, Check 371. Calculate the ending balance in the Computer Equipment account.

Chapter 4 Problems

076-101_CH04_868829.indd 97

97

8/29/05 1:05:12 PM

Problems

C H A P T ER 4

Problem 4–7 Analyzing Transactions Recorded in T Accounts

CHALLENGE PROBLEM

Richard Tang owns and operates a job placement service, Job Connect. The T accounts below summarize several business transactions for May.

Instructions Use a form similar to the one presented below. For each of the 10 transactions: 1. Identify the account debited, and record the account name in the appropriate column. 2. Indicate whether the account debited is being increased or decreased. 3. Identify the account credited, and write the account name in the appropriate column. 4. Indicate whether the account credited is being increased or decreased. 5. Write a short description of the transaction. (1)

(2)

(3)

(4)

(5)

Trans No.

Account Debited

Increase (I) or Decrease (D)

Account Credited

Increase (I) or Decrease (D)

Description

1

Cash in Bank

I

Richard Tang, Capital

I

Cash in Bank Debit  (1) 15,000 (9) 225

Credit  (4) 1,225 (6) 900 (7) 995 (8) 2,000

Office Equipment Debit  (2) 225 (3) 8,000 (4) 1,225

Credit  (5) 225

Computer Equipment Debit  (7) 995

Credit 

Richard Tang invested $15,000 in the business.

Accounts Receivable Debit  (5) 225

Credit  (9) 225

Office Furniture Debit  (6) 900 (10) 145

Credit 

Accounts Payable Debit  (8) 2,000

Credit  (3) 8,000 (10) 145

Richard Tang, Capital Debit 

Analyze 98

Credit  (1) 15,000 (2) 225

Design a diagram that shows the accounting equation for Job Connect after all transactions have been completed.

Chapter 4 Problems

076-101_CH04_868829.indd 98

4/6/06 5:35:20 PM

Winning Competitive Events

CHAPTER 4

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. If a business purchases a calculator on account, the accounts affected by this transaction are a. Cash in Bank and Accounts Payable. b. Office Equipment and Accounts Receivable. c. Office Equipment and Cash in Bank. d. Office Equipment and Accounts Payable. 2. A skeleton form of an account showing only the debit and credit columns is called a(n) a. accounting equation. b. T account. c. account balance. d. work sheet. e. none of these answers.

Business Professionals of America ACCOUNT IDENTIFICATION For each account name below, indicate its classification (A = Asset, L = Liability, OE = Owner’s Equity, R = Revenue, E = Expense) by writing the correct capital letter(s) on the blank. Then indicate its normal balance side (DR = Debit, CR = Credit, N = Neither). Account Name Classification Normal Balance 3. Cash ________ ________ 4. Accounts Payable ________ ________ 5. Owner’s Capital Account ________ ________

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 4. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

076-101_CH04_868829.indd 99

Chapter 4 Winning Competitive Events

99

10/13/05 9:57:46 PM

C H A P T ER 4 Critical Thinking

Double-Entry Accounting

CASE

STUDY

Service Business: Landscaping

ETHICS

Software Piracy

a mattoefr

))

$ )) Communicating ACCOUNTING

100

Real-World Applications and Connections

1. Which side of an account is the debit side? Which is the credit side? 2. How is the term credit in Chapter 3 different from credit in Chapter 4? 3. For each of the following transactions, state whether Cash in Bank is debited, credited, or not changed: (a) the business paid cash for a desk; (b) the business bought a computer on account; (c) a customer paid an outstanding invoice. 4. What is the relationship of a T account to a ledger account? 5. Think of a business you would like to open. Create a chart of accounts for the business. Include at least 10 different accounts. 6. Evaluate the usefulness of double-entry accounting. While in school Martin Hamilton gained experience working for a large landscaping company. Martin plans to start a business called Landscapes and Beyond. He has made a list of everything he owns, with the estimated value for each category. Lawn mowers $1,500 Shovels and lawn-care tools 180 Truck 8,700 Stereo equipment 1,000 50 books on landscaping 400 Desk, chair, and file cabinet 700 Martin also borrowed $5,000 from his family and will repay the debt in one year. INSTRUCTIONS Write the accounting equation for Martin’s new business, listing each item in the appropriate part of the equation. Imagine that you are a bookkeeper for an attorney who likes to use state-of-theart technology. The business just received the latest update on its Web site design software. You would like to use the software at home, so your assistant offers to make you a copy. Although you know that copyright laws protect software from unauthorized use, you figure that one little copy can’t hurt a multimillion dollar software company; and besides, you are not doing the actual copying. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Demonstrating the Double-Entry System Your supervisor asks you to teach some basic accounting to the other managers. Create a visual presentation to explain the double-entry accounting system. Use the purchase of a computer to show how transactions affect different accounts.

Chapter 4 Real-World Applications and Connections

076-101_CH04_868829.indd 100

8/29/05 1:05:17 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Teaching Others Keeping up with technology and learning new skills are important in today’s workplace. Learning from co-workers and supervisors is often the best way to increase your skills. ON THE JOB Assume that you work as the accountant for Westside Aquatics, a swim club in Florida. The club has 250 members. While some individuals pay cash on each visit, others are billed monthly for club use. A concession area featuring health foods and juices is a popular gathering place for members after swim lessons. INSTRUCTIONS List account names that would be used in a business like this. Describe to a classmate what kinds of transactions might affect each account. What is the normal balance side for each account?

Exchange Rates Businesses use exchange rates to convert from one currency to another. Exchange rates change all the time and are found in newspapers, at banks, and on the Internet. Suppose that you want to convert U.S. dollars to Canadian dollars, and $1.00 (U.S.) is currently worth $1.25182 (Canadian). You would multiply the U.S. dollars by the exchange rate as follows: U.S. dollars  exchange rate  Canadian dollars $5.00  1.25182  $6.26 INSTRUCTIONS Using this exchange rate, analyze which company has the higher value of total assets: Company A $150,000 (U.S.) Company B $176,000 (Canadian)

Your Spending Plan Cash is an asset. If you spend it, the asset decreases. A good way to safeguard your cash is to create a spending and savings plan, and then follow it. PERSONAL FINANCE ACTIVITY Suppose you want to save $20.00 per month. You have kept track of your personal finances for several months and you see the following pattern: Money coming in each month: allowance, $20.00; part-time job, $112.00 Money going out each month: lunches, $25.00; snacks, $8.50; bus fare, $8.00; CDs, $28.00; contributions to charity, $10.00; movie theatres, $22.00; pizza, $18.00; school supplies, $14.50 Using the above information, create a spending plan that allows you to save $20.00 per month. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 4.

glencoeaccounting.glencoe.com

076-101_CH04_868829.indd 101

CHAPT E R 4

Chapter 4 Real-World Applications and Connections

101

4/6/06 5:35:26 PM

CH A P T ER 5

Transactions That Affect Revenue, Expenses, and Withdrawals

What You’ll Learn 1.

Explain the difference between permanent accounts and temporary accounts.

2.

List and apply the rules of debit and credit for revenue, expense, and withdrawals accounts.

3.

Use the six-step method to analyze transactions affecting revenue, expense, and withdrawals accounts.

4.

5.

Test a series of transactions for equality of debits and credits.

BEFORE YOU

READ

Predict 1. 2. 3. 4.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING REVENUE AND EXPENSES

Southwest Airlines While other large airlines lost money after the 9/11 disaster,

▲

Define the accounting terms introduced in this chapter.

Southwest Airlines was flying high. The airline has posted

Why It’s Important

for newer airlines to follow.

Temporary accounts show the changes in owner’s equity during each accounting period.

year. Each one-way fare averaged over $88 per passenger.

more than 30 years of consecutive profits and become a model Southwest carries more than 65 million passengers every Like any business, Southwest must consider expenses. Operating expenses include the cost of more than 1 billion gallons of jet fuel and payroll expenses for more than 32,000 employees. Don’t forget the cost of snacks. Southwest serves 85 million bags of peanuts each year.

What Do You Think? Aside from passenger fares, from what other sources do you think Southwest Airlines generates revenues?

102

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 102

9/2/05 4:35:21 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE When you receive a paycheck, you probably think about the amount of money you have and the things you would like to buy. Businesses like Southwest Airlines also earn money and spend it on items used to operate the business. In this chapter you will learn to analyze transactions involving the revenue and expenses of a business.

Personal Connection 1. How does your workplace (or the workplace of family or friends) earn revenue? 2. What does the business buy with that revenue? 3. How do these revenue and expense transactions affect the profits of a business?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 5.

glencoeaccounting.glencoe.com

102-129_CH05_868829.indd 103

103

8/29/05 1:06:43 PM

SECTION 1

BEFORE YOU

READ

Main Idea

Revenues, expenses, and withdrawals are temporary accounts. They start each new accounting period with zero balances.

Read to Learn… ➤ how temporary account

transactions change owner’s equity. (p. 104) ➤ the rules of debit and credit for temporary accounts. (p. 106)

Key Terms

temporary accounts permanent accounts

104

Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity In Chapter 4 you learned to record transactions in asset, liability, and owner’s capital accounts. In this chapter you will learn to record transactions in revenue, expense, and owner’s withdrawals accounts. These accounts provide information about how the business is doing. A pilot for Southwest Airlines would never take off in a 737 equipped with only a speedometer and a gas gauge. These two instruments, although necessary, do not give a pilot all of the information needed to keep such a complex aircraft on course and operating smoothly. Operating a business is a bit like operating a 737. Owners need revenue and expense information to keep the business on course.

Temporary and Permanent Accounts What Is the Difference Between Temporary Accounts and Permanent Accounts? You learned earlier that the owner’s capital account shows the amount of the owner’s investment, or equity, in a business. Owner’s equity is increased or decreased by transactions other than owner’s investments. For example, the revenue, or income, earned by the business increases owner’s equity. Both expenses and owner’s withdrawals decrease owner’s equity. (Remember that revenue is not the same as an owner’s investment, and expense is not the same as an owner’s withdrawal.) Revenue, expenses, and withdrawals could be recorded as increases or decreases directly in the capital account. This method, however, makes classifying information about these transactions difficult. A more informative way to record transactions affecting revenue and expenses is to set up separate accounts for each type of revenue or expense. Such information helps the owner decide, for example, whether some expenses need to be reduced. As you learned in Chapter 2, the life of a business is divided into periods of time called accounting periods. The activities for a given accounting period are summarized and then the period is closed. A new period starts, and transactions for the new period are entered into the accounting system. The process continues as long as the business exists. Using Temporary Accounts. Revenue, expense, and withdrawals accounts are used to collect information for a single accounting period. These accounts are called temporary accounts . Temporary

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 104

4/6/06 5:36:33 PM

Utilities Expense Accumulated telephone costs for accounting period $2,857 Accumulated electricity costs for accounting period Total for accounting period

5,141 $7,998

Utilities Expense balance transferred to Owner’s Capital at end of accounting period. Expenses decrease owner’s capital. Owner’s Capital

Balance of Utilities Expense

$7,998

Balance at Beginning of Accounting Period

$90,000

Balance at End of Accounting Period

$82,002

Figure 5–1 The Relationship of Temporary Accounts to the Owner’s Capital Account accounts start each new accounting period with zero balances. That is, the amounts in these accounts are not carried forward from one accounting period to the next. Temporary accounts are not temporary in the sense that they are used for a short time and then discarded. They continue to be used in the accounting system, but the amounts recorded in them accumulate for only one accounting period. At the end of that period, the balances in the temporary accounts are transferred to the owner’s capital account. (The procedure for transferring these balances to owner’s capital is explained in Chapter 10.) Let’s use Utilities Expense, a temporary account, as an example. During an accounting period, business transactions related to utilities such as electricity and telephones are recorded in Utilities Expense. By using this separate account, the owner can see at a glance how much money is being spent on this expense. The individual transaction amounts accumulate in the account as the accounting period progresses. At the end of the period, the total spent is transferred to the owner’s capital account and subtracted from the capital account balance. Remember, expenses decrease owner’s capital. In Figure 5–1, the account, Utilities Expense, starts the next accounting period with a zero balance—ready for the transactions in the new period. Using Permanent Accounts. In contrast to the temporary accounts, the owner’s capital account is a permanent account. Asset and liability accounts are also permanent accounts. Permanent accounts are continuous from one accounting period to the next. In permanent accounts

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity

102-129_CH05_868829.indd 105

105

8/29/05 1:06:59 PM

AS YOU

READ

Instant Recall Permanent Account Normal Balances Assets → debit Liabilities Owner’s Capital

→ →

credit credit

the dollar balances at the end of one accounting period become the dollar balances for the beginning of the next accounting period. For example, if a business has furniture totaling $2,875 at the end of one accounting period, the business will start with $2,875 in furniture at the beginning of the next accounting period. The ending balances in permanent accounts are carried forward to the next accounting period as the beginning balances. End of Accounting Period

Beginning of Next Accounting Period

Furniture Debit End Bal. 2,875

Furniture Credit

Debit

Credit

Beg. Bal. 2,875

The permanent accounts show balances on hand or amounts owed at any time. They also show the day-to-day changes in assets, liabilities, and owner’s capital.

The Rules of Debit and Credit for Temporary Accounts AS YOU

READ

It’s Not What It Seems Temporary The term temporary might make you think of something that lasts for a limited time. A temporary account, however, always stays in the ledger. Its balance is reduced to zero at the end of each accounting period.

What Are the Normal Balances of Revenue, Expense, and Withdrawals Accounts? In Chapter 4 you learned the rules of Owner’s Capital Account debit and credit for the asset, liability, and owner’s capital accounts. In this chapter Credit Debit we will continue with the rules of debit
 Increase Decrease and credit, this time for revenue, expense, Side Side and withdrawals accounts. Before looking Normal Balance at these rules, let’s review quickly the T account showing the rules of debit and credit for the owner’s capital account. As you will see, the rules of debit and credit for accounts classified as revenue, expense, and withdrawals accounts are related to the rules for the owner’s capital account.

Rules for Revenue Accounts Accounts set up to record business income are classified as revenue accounts. The following rules of debit and credit apply to revenue accounts: Rule 1: A revenue account is increased (
) on the credit side. Rule 2: A revenue account is decreased () on the debit side. Rule 3: The normal balance for a revenue account is the increase side, or the credit side. Revenue accounts normally have credit balances. Revenue earned from selling goods or services increases owner’s capital. The relationship of revenue accounts to the owner’s capital account is shown by the T accounts in Figure 5–2. Can you explain why the T account for revenue is used to represent the credit (right) side of the capital account?

106

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 106

8/29/05 1:07:05 PM

Permanent Account Owner’s Capital Debit  Decrease Side

AS YOU

Te m Credit po ra
ry Ac Increase Side co Normal Balance un t Revenue Debit  Decrease Side

Credit
Increase Side Normal Balance

READ

Key Point Temporary Account Normal Balances Revenue → credit Expense Owner’s Withdrawals

→ →

debit debit

A credit balance is recorded on the credit side.

Figure 5–2 Rules of Debit and Credit for Revenue Accounts Increases in owner’s capital are shown on the credit side of that account. Revenue increases owner’s capital, so the revenue account is used to represent the credit side of the owner’s capital account. We can summarize the rules of debit and credit for revenue accounts with a T account illustration. Revenue Accounts Debit  (2) Decrease Side

Credit
(1) Increase Side (3) Normal Balance

Let’s apply the rules of debit and credit to an actual revenue account. Look at the entries in the T account for the revenue account called Fees. The increases to the revenue account are recorded on the right, or credit, side of the T account. The decreases are recorded Fees on the left, or debit, side. To find the balDebit Credit ance, subtract total debits ($200) from 
total credits ($500
$1,000
$2,000  200 500 1,000 $3,500). You get a balance of $3,300 on 2,000 the credit side, the normal balance side Bal. 3,300 for a revenue account.

Rules for Expense Accounts Accounts that record the costs of operating a business are expense accounts. These debit and credit rules apply to expense accounts: Rule 1: An expense account is increased on the debit side. Rule 2: An expense account is decreased on the credit side. Rule 3: The normal balance for an expense account is the increase side, or the debit side. Expense accounts normally have debit balances.

AS YOU

READ

In Your Own Words Temporary and Permanent Explain how the terms temporary and permanent apply to ledger accounts.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity

102-129_CH05_868829.indd 107

107

8/29/05 1:07:06 PM

Expenses are the costs of doing business. Expenses decrease owner’s capital. Revenues have the opposite impact; revenues increase owner’s capital. Look at the T accounts in Figure 5–3. Can you explain why the T account for expenses is used to represent the debit (left) side of the capital account? Permanent Account Owner’s Capital

m Te

po

r ra

c yA

un co

t

Debit  Decrease Side

Te m Credit po ra
ry Ac Increase Side co Normal Balance un t Revenue

Expenses Debit
Increase Side Normal Balance

Figure 5–3 Rules of Debit and Credit for Expense Accounts

Debit  Decrease Side

Credit  Decrease Side

A debit balance is recorded on the debit side.

Credit
Increase Side Normal Balance

A credit balance is recorded on the credit side.

Decreases in owner’s capital are shown on the debit side of that account. Since expenses decrease owner’s capital, expense accounts are used to represent the debit side of the owner’s capital account. Let’s use a T account to summarize the rules of debit and credit for expense accounts. Expense Accounts Debit
(1) Increase Side (3) Normal Balance

Credit  (2) Decrease Side

Now look at the entries recorded in the T account called Advertising Expense. The increases to the expense account are recorded on the left, or debit, side of the T account. The decreases to the account are recorded on the right, Advertising Expense or credit, side of the T account. When Credit Debit total credits ($125) are subtracted from 
125 400 total debits ($600), there is a balance of 200 $475 on the debit side, which is the norBal. 475 mal balance side for expense accounts.

Rules for the Withdrawals Account A withdrawal is an amount of money or an asset the owner takes out of the business. The withdrawals account is classified as a temporary owner’s equity account. Recall that the permanent owner’s equity account is the owner’s capital account. Withdrawals, like expenses, decrease capital, so the rules of debit and credit are the same as for expense accounts. 108

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 108

8/29/05 1:07:07 PM

Withdrawals Account Debit
(1) Increase Side (3) Normal Balance

Credit  (2) Decrease Side

W. Smith, Withdrawals

Rule 1: The withdrawals account is increased on the debit side. Rule 2: The withdrawals account is decreased on the credit side. Rule 3: The normal balance for the withdrawals account is the increase side or debit side. The withdrawals account normally has a debit balance.

Credit  200

Debit
500 1,500 Bal. 1,800

Review the entries in the T account W. Smith, Withdrawals. The increases are recorded on the left, or debit side, of the T account. The decreases are recorded on the right, or credit, side of the T account. When total credits ($200) are subtracted from total debits ($2,000), there is a balance of $1,800 on the debit side, which is the normal balance side for the withdrawals account.

AS YOU

READ

Compare and Contrast Capital and Withdrawals Consider the owner’s capital account and the owner’s withdrawals account. How are they similar? How are they different?

Summary of the Rules of Debit and Credit for Temporary Accounts Figure 5–4 summarizes the rules of debit and credit for the temporary accounts and the basic accounting relationships of these accounts to the owner’s capital account. Permanent Account Owner’s Capital

m Te

po

ra

r

un co c yA

t

Debit  Decrease Side

Te m Credit po ra
ry Ac Increase Side co Normal Balance un t Revenue

Expenses Debit
Increase Side Normal Balance

Credit  Decrease Side

Debit  Decrease Side

Credit
Increase Side Normal Balance

Withdrawals Debit
Increase Side Normal Balance

Credit  Decrease Side

A debit balance is recorded on the debit side.

A credit balance is recorded on the credit side.

Figure 5–4 Rules of Debit and Credit for Temporary Accounts

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity

102-129_CH05_868829.indd 109

109

8/29/05 1:07:07 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to illustrate the different types of accounts. Fill in each blank box with one or more of the following terms: assets, liabilities, owner’s capital, revenue, expenses, owner’s withdrawals.

.ORMAL$EBIT"ALANCE

.ORMAL#REDIT"ALANCE

0ERMANENT!CCOUNTS

4EMPORARY!CCOUNTS

Do the Math A company had the following activity during the accounting period: Made sales: $5,000 Incurred advertising expenses: 500 Incurred salaries expenses: 3,000 Deposited a check from the owner’s personal savings account: 1,200 Additionally, the owner removed a computer from the business for personal use. The business had paid $650 for the computer. What was the total effect on owner’s equity?

Problem 5–1 Applying the Rules of Debit and Credit Caroline Palmer uses the following accounts in her San Francisco–Los Angeles commuter shuttle service. General Ledger Cash in Bank Advertising Expense Caroline Palmer, Withdrawals Airplanes Fuel and Oil Expense Repairs Expense

Caroline Palmer, Capital Accounts Receivable Food Expense Flying Fees Accounts Payable

Instructions In the form provided in your working papers, provide the following information for each account. The first account is completed as an example. 1. 2. 3. 4.

Classify the account as an asset, liability, owner’s equity, revenue, or expense account. Indicate whether the increase side is a debit or a credit. Indicate whether the decrease side is a debit or a credit. Indicate whether the account has a normal debit balance or a normal credit balance.

Account Account Name Classification Cash in Bank

110

Asset

Increase Side

Decrease Side

Normal Balance

Debit

Credit

Debit

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 110

8/29/05 1:07:09 PM

Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions

SECTION 2

In Section 1 you learned the rules of debit and credit for revenue, expense, and withdrawals accounts. Learning to apply these rules to typical business transactions is our next task. In the course of a week, a business might receive money, pay rent, or pay utility bills. Let’s look at more transactions for Roadrunner Delivery Service.

Analyzing Transactions How Do You Analyze Transactions That Involve Temporary Accounts? In Chapter 4 Roadrunner’s transactions dealt with asset and liability accounts and with the permanent owner’s equity account, Maria Sanchez, Capital. Using the rules of debit and credit, let’s analyze several business transactions that affect revenue, expense, and owner’s withdrawals accounts. Use the same six-step method you learned in Chapter 4. Refer to Roadrunner’s chart of accounts on page 79 to analyze the following transactions.

BEFORE YOU

READ

Main Idea

Double-entry accounting requires that total debits and total credits are always equal.

Read to Learn…

➤ how to analyze revenue, expense,

and owner’s withdrawals transactions. (p. 111) ➤ how to confirm that total debits and total credits are equal in the ledger. (p. 115)

Key Term

revenue recognition

B u s i n e s s Tr a n s a c t i o n 8 On October 15 Roadrunner provided delivery services for Sims Corporation. A check for $1,200 was received in full payment. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

1. The accounts Cash in Bank and Delivery Revenue are affected. 2. Cash in Bank is an asset account. Delivery Revenue is a revenue account. 3. Cash in Bank is increased by $1,200. Delivery Revenue is increased by $1,200.

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $1,200. 5. Increases in revenue accounts are recorded as credits. Credit Delivery Revenue for $1,200.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions

102-129_CH05_868829.indd 111

111

8/29/05 1:07:11 PM

6.

T ACCOUNTS

Cash in Bank Debit
1,200

Credit 

Delivery Revenue Debit 

Credit
1,200

B u s i n e s s Tr a n s a c t i o n 9 On October 16 Roadrunner mailed Check 103 for $700 to pay the month’s rent. ANALYSIS

Identify Classify
/

1. The accounts Rent Expense and Cash in Bank are affected. 2. Rent Expense is an expense account. Cash in Bank is an asset account. 3. Rent Expense is increased by $700. Cash in Bank is decreased by $700.

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Rent Expense for $700. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $700.

T ACCOUNTS

6.

Rent Expense Debit
700

Credit 

Cash in Bank Debit


Credit  700

B u s i n e s s Tr a n s a c t i o n 1 0 On October 18 Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

112

1. The accounts Advertising Expense and Accounts Payable—Beacon Advertising are affected. 2. Advertising Expense is an expense account. Accounts Payable— Beacon Advertising is a liability account. 3. Advertising Expense is increased by $75. Accounts Payable—Beacon Advertising is increased by $75.

4. Increases in expense accounts are recorded as debits. Debit Advertising Expense for $75. 5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—Beacon Advertising for $75.

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 112

8/29/05 1:07:13 PM

6.

T ACCOUNTS

Accounts Payable— Beacon Advertising

Advertising Expense Debit
75

Credit 

Debit 

Credit
75

B u s i n e s s Tr a n s a c t i o n 1 1 On October 20 Roadrunner billed City News $1,450 for delivery services. ANALYSIS

Identify Classify
/

1. The accounts Accounts Receivable—City News and Delivery Revenue are affected. 2. Accounts Receivable—City News is an asset account. Delivery Revenue is a revenue account. 3. Accounts Receivable—City News is increased by $1,450. Delivery Revenue is increased by $1,450.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Accounts Receivable—City News for $1,450. 5. Increases in revenue accounts are recorded as credits. Credit Delivery Revenue for $1,450.

T ACCOUNTS

6.

Accounts Receivable—City News Debit
1,450

Credit 

Delivery Revenue Debit 

Credit
1,450

In Transaction 11 Roadrunner recorded revenue for services provided, even though the money had not been collected. Following the GAAP principle of revenue recognition , revenue is recorded on the date earned, even if cash has not been received.

B u s i n e s s Tr a n s a c t i o n 1 2 On October 28 Roadrunner paid a $125 telephone bill with Check 104. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

1. The accounts Utilities Expense and Cash in Bank are affected. 2. Utilities Expense is an expense account. Cash in Bank is an asset account. 3. Utilities Expense is increased by $125. Cash in Bank is decreased by $125.

4. Increases in expense accounts are recorded as debits. Debit Utilities Expense for $125. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $125.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions

102-129_CH05_868829.indd 113

113

8/29/05 1:07:16 PM

6.

T ACCOUNTS

Utilities Expense Debit
125

Credit 

Cash in Bank Debit


Credit  125

B u s i n e s s Tr a n s a c t i o n 1 3 On October 29 Roadrunner wrote Check 105 for $600 to have the office repainted. ANALYSIS

Identify Classify
/

1. The accounts Maintenance Expense and Cash in Bank are affected. 2. Maintenance Expense is an expense account. Cash in Bank is an asset account. 3. Maintenance Expense is increased by $600. Cash in Bank is decreased by $600.

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Maintenance Expense for $600. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $600.

T ACCOUNTS

6.

Cash in Bank

Maintenance Expense Debit
600

Credit 

Debit


Credit  600

B u s i n e s s Tr a n s a c t i o n 1 4 On October 31 Maria Sanchez wrote Check 106 to withdraw $500 cash for personal use. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

114

1. The accounts Maria Sanchez, Withdrawals and Cash in Bank are affected. 2. Maria Sanchez, Withdrawals is an owner’s equity account. Cash in Bank is an asset account. 3. Maria Sanchez, Withdrawals is increased by $500. Cash in Bank is decreased by $500.

4. Increases in the owner’s withdrawals account are recorded as debits. Debit Maria Sanchez, Withdrawals for $500. 5. Decreases in assets are recorded as credits. Credit Cash in Bank for $500.

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 114

8/29/05 1:07:16 PM

T ACCOUNTS

6.

Maria Sanchez, Withdrawals Debit
500

Cash in Bank Debit


Credit 

Credit  500

Testing for the Equality of Debits and Credits Why Should You Make Sure the Ledger Is in Balance? In a double-entry accounting system, correct analysis and recording of business transactions should result in total debits being equal to total credits. Testing for the equality of debits and credits is one way of finding out whether you have made any errors in recording transaction amounts. To test for the equality of debits and credits, follow these steps: Step 1. Make a list of the account names used by the business. Step 2. To the right of each account name, list the balance of the account. Use two columns, one for debit balances and the other for credit balances. Step 3. Add the amounts in each column. If you have recorded all the amounts correctly, the total of the debit column will equal the total of the credit column. The test for equality of debits and credits for the transactions in Chapters 4 and 5 shows that total debits are equal to total credits, so the ledger is in balance. ACCOUNT NAME

DEBIT BALANCES

101 Cash in Bank

$ 21,125

105 Accounts Receivable—City News

CREDIT BALANCES

1,450

110 Accounts Receivable—Green Company 115 Computer Equipment 120 Office Equipment 125 Delivery Equipment

3,000 200 12,000

201 Accounts Payable—Beacon Advertising

$

75

205 Accounts Payable—North Shore Auto

11,650

301 Maria Sanchez, Capital

25,400

302 Maria Sanchez, Withdrawals

500

303 Income Summary 401 Delivery Revenue 501 Advertising Expense

MATH HINTS Showing Cents When

writing amounts of money, be consistent in showing cents. If one amount includes cents, show cents for all the amounts. Be sure to align the amounts on the decimal points. Incorrect: $ 21,125 1,450.77 Correct: $ 21,125.00 1,450.77

2,650 75

505 Maintenance Expense

600

510 Rent Expense

700

515 Utilities Expense

125 $ 39,775

$ 39,775

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions

102-129_CH05_868829.indd 115

115

8/29/05 1:07:19 PM

Assessment

SECTION 2 AFTER YOU

READ

Reinforce the Main Idea Use a chart like this to organize the test for the equality of debits and credits. Write each of these terms in the appropriate box: assets, liabilities, owner’s capital, owner’s withdrawals, revenue, expenses. (Don’t use the shaded boxes.)

$EBIT"ALANCES

#REDIT"ALANCES

Do the Math This bar chart shows the first quarter’s revenue and expense. In approximate amounts, what month had the most revenue and what was the amount? What month had the highest expense and what was the amount? Overall, did the business have a profit or loss? What was the amount?

$14,000 12,000

Revenue Expenses

10,000

F285937448B

F285937448B

8,000 6,000 4,000

F285937448B

F285937448B

F285937448B

F285937448B

2,000 0

F285937448B

F285937448B

January

February

March

First Quarter

Problem 5–2 Identifying Accounts Affected by Transactions John Albers uses the following accounts in his business. General Ledger Cash in Bank Accounts Receivable Office Equipment Accounts Payable

John Albers, Capital John Albers, Withdrawals Service Fees

Advertising Expense Rent Expense Utilities Expense

Instructions In your working papers: 1. Identify the two accounts affected by each of the following transactions. 2. Indicate whether each account is debited or credited. Date

July

116

1 3 10 17

Transactions

1. 2. 3. 4.

Issued Check 543 to pay the electric bill for the month. Billed a customer for services provided on account. John Albers took cash from the business for his personal use. Issued Check 544 to pay for an advertisement.

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

102-129_CH05_868829.indd 116

8/29/05 1:07:20 PM

Accounting Careers in Focus EQUITY RESEARCH ASSOCIATE

Eaton Vance Management, Boston, Massachusetts Rukma Raybardhan .. Tips from . Q: A: Q: A:

What does Eaton Vance Management do?

We manage portfolios, or groups of investments.

What are your day-to-day responsibilities? I conduct preliminary research for analysts who cover certain industries and build and maintain financial models. My job involves reviewing and summarizing financial statements and attending meetings.

Q: What do you find exciting about your job? A: I love the fact that I get to see the results of my work by following the performance of our investments. I enjoy learning about various industries and companies, and I learn something new every day.

to your When it comes t owing the righ job search, kn ake all the difperson can m job openings ference. Many or ord of mouth are filled by w als. Tell everythrough referr b about your jo one you know , ily m g your fa hunt, includin hbors, and teac friends, neigh by t be surprised ers. You migh help you. who is able to

Q: What advice do you have for accounting students just beginning their careers? A: Work hard and get good grades. Also, concentrate on finding internships. The internships I held worked in my favor when I was looking for my first job in finance. Try to network as much as possible. You never know who can help your career advancement and open doors for you.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of Work: Assist analysts with investment research. Training or Education Needed: A bachelor’s degree with a concentration in accounting or finance. Aptitudes, Abilities, and Skills: An understanding of the stock market; strong analytical skills; attention to detail. Salary Range: $40,000 and up, depending on experience and employer. Career Path: Start in an entry-level position. As you gain experience and prepare to move into higher-level roles, consider obtaining a master’s degree in business administration or becoming a chartered financial analyst (CFA). The CFA title is an important credential for people working in the investment field.

Thinking Critically

What are some of the best ways to network with other accounting professionals? Chapter 5 Accounting Careers in Focus

102-129_CH05_868829.indd 117

117

8/30/05 2:57:14 PM

Summary

CH A P T ER 5 Key Concepts

1. The accounts used by a business can be separated into permanent accounts and temporary accounts. Permanent accounts carry balances forward from one accounting period to the next. The following types of accounts are permanent accounts: • assets • liabilities • owner’s capital Temporary accounts accumulate dollar amounts for only one accounting period and then start each new accounting period with a zero balance. The following types of accounts are temporary accounts: • revenue • expenses • owner’s withdrawals 2. The rules of debit and credit for permanent accounts are summarized as follows: ASSETS



LIABILITIES




OWNER’S EQUITY

Permanent Accounts Asset Accounts Debit
Increase Side Normal Balance

Credit  Decrease Side

Liability Accounts Credit
Increase Side Normal Balance

Debit  Decrease Side

Owner’s Capital Account Debit  Decrease Side

Credit
Increase Side Normal Balance

The rules of debit and credit for temporary accounts are summarized as follows: Temporary Accounts

Debit  Decrease Side

118

Withdrawals

Expenses

Revenue Credit
Increase Side Normal Balance

Debit
Increase Side Normal Balance

Credit  Decrease Side

Debit
Increase Side Normal Balance

Credit  Decrease Side

Chapter 5 Summary

102-129_CH05_868829.indd 118

8/29/05 1:07:26 PM

Summary

CHAPT E R 5

Revenue Accounts Rule 1: A revenue account is increased (
) on the credit side. Rule 2: A revenue account is decreased () on the debit side. Rule 3: The normal balance for a revenue account is the increase side, or the credit side. Revenue accounts normally have credit balances. Expense Accounts Rule 1: An expense account is increased on the debit side. Rule 2: An expense account is decreased on the credit side. Rule 3: The normal balance for an expense account is the increase side, or the debit side. Expense accounts normally have debit balances. The Withdrawals Account Rule 1: The withdrawals account is increased on the debit side. Rule 2: The withdrawals account is decreased on the credit side. Rule 3: The normal balance for the withdrawals account is the increase side or debit side. The withdrawals account normally has a debit balance. 3. Follow the six-step method you learned in Chapter 4 to analyze transactions affecting revenue, expense, and withdrawals. Step 1: Step 2: Step 3: Step 4: Step 5: Step 6:

Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account affected. Determine which account is debited and for what amount. Determine which account is credited and for what amount. Use T accounts to describe the entry.

4. In a double-entry accounting system, total debits should always equal total credits. Use these steps to test for the equality of debits and credits. Step 1: List the account names the business uses. Step 2: To the right of each account name, list its account balance. Use two columns, one for debit balances and the other for credit balances. Step 3: Add the amounts in each column.

Key Terms permanent accounts (p. 105) revenue recognition

(p. 113)

temporary accounts

(p. 104)

Chapter 5 Summary

102-129_CH05_868829.indd 119

119

8/29/05 1:07:28 PM

C H A P T ER 5 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

Permanent and Temporary Accounts a. Why are temporary accounts used? b. What is the difference between a temporary account and a permanent account? Debit and Credit Rules a. State briefly the rules of debit and credit for increasing and decreasing each of the following types of accounts: • assets • liabilities • owner’s capital b. State briefly the rules of debit and credit for increasing and decreasing each of the following types of accounts: • revenue • expenses • owner’s withdrawals Temporary Account Transactions a. Which account classification contains both a permanent account and a temporary account? b. If one side of a transaction involves a revenue account, can the other side involve the owner’s capital account? Why or why not? Tests of Equality a. Why should you test for the equality of debits and credits? b. How would you test for the equality of debits and credits?

Apply Key Terms You have been asked to make a presentation to your company’s owners. For the owners to understand the difference in the accounts you manage, you must be able to explain the following key terms: permanent accounts revenue recognition

temporary accounts

Create three examples that could be used as overhead transparencies. Each example (master) should show a term, a brief definition, and an illustration or example.

120

Chapter 5 Review and Activities

102-129_CH05_868829.indd 120

8/29/05 1:07:30 PM

Computerized Accounting

CHAPT E R 5

The Chart of Accounts Making the Transition from a Manual to a Computerized System Task Setting up the accounts in a general ledger

Manual Methods

Computerized Methods

• Accounts are set up in the general ledger using general ledger account forms. • Accounts can be set up with or without beginning balances.

• Accounts are set up using defined account numbers and account types. • Accounts can be set up with or without beginning balances. • Accounting software programs offer hundreds of sample companies from which you can copy the chart of accounts instead of creating each account individually.

Chart of Accounts Assets

Owner’s Equity

Cash in Bank

Maria Sanchez, Capital

Accounts Receivable

Maria Sanchez, Withdrawals

Computer Equipment Revenue

Office Equipment Delivery Equipment Liabilities

Delivery Revenue Expenses

Accounts Payable

Advertising Expense Maintenance Expense Rent Expense

Q&A Peachtree Question How do I create general ledger accounts in Peachtree?

Answer 1. 2. 3. 4. 5.

From the Maintain menu, select Chart of Accounts. Enter the account number in the Account ID box. Enter the account name in the Description box. From the Account Type drop-down list, select the account type. Click Save.

QuickBooks Q & A QuickBooks Question How do I create general ledger accounts in QuickBooks?

Answer 1. 2. 3. 4.

From the Lists menu, select Chart of Accounts. Click the Account pull-down menu and choose New. From the Type drop-down list, select the account type. Enter the account number in the Number field and account name in the Name field. 5. Click OK.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 5 Computerized Accounting

102-129_CH05_868829.indd 121

121

4/6/06 5:37:02 PM

Problems

C H A P T ER 5 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 5–3 1. Select the problem set for Wilderness Rentals (Prob. 5–3). 2. Rename the company and set the system date. 3. Print a Chart of Accounts using the General Ledger option in the Reports menu. 4. Review the Chart of Accounts. 5. Complete the Analyze activity manually. 6. End the session.

Manual Glencoe Peachtree Complete OR Accounting Software Working Papers

Ronald Hicks uses these accounts in his business, Wilderness Rentals. General Ledger 101 Cash in Bank 105 Accounts Receivable— Helen Katz 120 Office Equipment 125 Camping Equipment

TIP: You will learn how to enter transactions into the accounts in the next chapter.

122

Ronald Hicks, Capital Ronald Hicks, Withdrawals Equipment Rental Revenue Maintenance Expense Utilities Expense

shown in the example below. Record your answers in your working papers. a. Explain the debit. b. Explain the credit. Example: On Jan. 2 Ronald Hicks paid the bill for office cleaning, $100. a. The expense account 505 Maintenance Expense is increased. Increases in expenses are recorded as debits. b. The asset account 101 Cash in Bank is decreased. Decreases in assets are recorded as credits. Transactions

3 8

1. Select the problem set for Hot Suds Car Wash (Prob. 5–4). 2. Rename the company and set the system date. 3. Print a Chart of Accounts using the General Ledger option in the Reports menu. 4. Review the Chart of Accounts. 5. Complete the Analyze activity manually. 6. End the session.

301 305 401 505 525

Instructions Analyze each of the following transactions using the format

Jan.

Step–by–Step Instructions: Problem 5–4

Spreadshee Spreadsheet Templates

Problem 5–3 Identifying Increases and Decreases in Accounts

Date

SMART GUIDE

OR

12

Analyze

1. Ronald Hicks withdrew $500 from his business for his own use, Check 225. 2. The business received $1,200 cash in rental fees from various customers. 3. The business paid a telephone bill of $85, Check 226. Calculate the amount of increase or decrease in the Cash in Bank account.

Problem 5–4 Using T Accounts to Analyze Transactions Regina Delgado, owner of Hot Suds Car Wash, uses these accounts: General Ledger 101 Cash in Bank 401 Wash Revenue 125 Office Equipment 510 Maintenance Expense 205 Accounts Payable— 520 Rent Expense O’Brian’s Office Supply 301 Regina Delgado, Capital 305 Regina Delgado, Withdrawals CONTINUE

Chapter 5 Problems

102-129_CH05_868829.indd 122

8/29/05 1:07:41 PM

Problems

CHAPT E R 5

Instructions In your working papers: 1. Determine which accounts are affected for each transaction. 2. Prepare T accounts for the accounts affected. 3. Enter the amount of the debit and the amount of the credit in the T accounts. Date

Jan.

7 12 15 29

Analyze

Transactions

1. Received a check for $1,675 for car wash services. 2. Paid the monthly rent of $450 by writing Check 212. 3. Regina Delgado withdrew $250 for her personal use, Check 213. 4. Had the computer repaired at O’Brian’s Office Supply for $245 and was given until next month to pay. Identify the transactions that affect expense accounts.

Problem 5–5 Analyzing Transactions into Debit and Credit Parts Abe Shultz, owner of Kits & Pups Grooming, uses the following accounts to record transactions for the month. General Ledger 101 Cash in Bank 105 Accounts Receivable— Juan Alvarez 140 Grooming Equipment 205 Accounts Payable— Dogs & Cats Inc. 301 Abe Shultz, Capital 305 Abe Shultz, Withdrawals

401 405 501 505 510 520 530

Boarding Revenue Grooming Revenue Advertising Expense Equipment Repair Expense Maintenance Expense Rent Expense Utilities Expense

Instructions For each transaction: 1. Prepare a T account for each account listed. 2. Enter a balance of $15,000 in the Cash in Bank account; also enter a balance of $15,000 in the Abe Shultz, Capital account. 3. Analyze and record each of the following business transactions, using the appropriate T accounts. Identify each transaction by number. 4. After all the business transactions have been recorded, write the word Balance on the normal balance side of each account. 5. Compute and record the balance for each account.

SMART GUIDE Step–by–Step Instructions: Problem 5–5 1. Select the problem set for Kits & Pups Grooming (Prob. 5–5). 2. Rename the company and set the system date. 3. Add new general ledger accounts using the Chart of Accounts option in the Maintain menu. 4. Enter beginning balances using the Chart of Accounts option in the Maintain menu. 5. Print a Chart of Accounts using the General Ledger option in the Reports menu. 6. Proof your work. 7. Complete the Analyze activity manually. 8. End the session.

TIP: When a report list appears, double-click a report title to go directly to that report.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 5–5 1. Restore the Problem 5-5.QBB file. 2. Add new general ledger accounts using the Chart of Accounts option in the Lists menu. 3. Enter beginning balances using the Chart of Accounts option in the Lists menu. 4. Print a Chart of Accounts by selecting Print List in the File menu. 5. Proof your work. 6. Complete the Analyze activity manually. 7. Back up your work.

CONTINUE Chapter 5 Problems

102-129_CH05_868829.indd 123

123

4/6/06 5:37:06 PM

Problems

C H A P T ER 5 Date

Jan.

Transactions

1 10 12 15 17

1. 2. 3. 4. 5.

20 22

6. 7.

23

8.

25

9.

Analyze

SMART GUIDE Step–by–Step Instructions: Problem 5–6 1. Select the problem set for Outback Guide Service (Prob. 5–6). 2. Rename the company and set the system date. 3. Add new general ledger accounts using the Chart of Accounts option in the Maintain menu. 4. Print a Chart of Accounts using the General Ledger option in the Reports menu. 5. Proof your work. 6. Complete the Analyze activity manually. 7. End the session.

TIP: You can use General Ledger Navigation Aid to access the Maintain Chart of Accounts window.

Identify the transactions that affect owner’s equity.

Problem 5–6 Analyzing Transactions into Debit and Credit Parts Juanita Ortega operates Outback Guide Service. She uses the following accounts to record and summarize her business transactions. General Ledger 101 Cash in Bank 105 Accounts Receivable— Mary Johnson 150 Rafting Equipment 205 Accounts Payable— Peak Equipment Inc.

301 302 401 505 515 520

Juanita Ortega, Capital Juanita Ortega, Withdrawals Guide Service Revenue Maintenance Expense Rent Expense Utilities Expense

Instructions For each transaction: 1. Prepare a T account for each account the business uses. 2. Analyze and record each of the following transactions using the appropriate T accounts. Identify each transaction by number. 3. After recording all transactions, compute and record the account balance on the normal balance side of each T account. 4. Test for the equality of debits and credits. Date

Jan.

Transactions

2 7 10

124

Purchased grooming equipment for $12,700, Check 283. Wrote Check 284 for advertising, $125. Received $1,850 cash for dog boarding services. Paid $150 for equipment repair, Check 285. Purchased a dog cage on account from Dogs & Cats Inc. for $75. Abe Shultz withdrew $150 for personal use, Check 286. Billed Juan Alvarez for $775 covering grooming services for all of the dogs boarded at the kennels he owns. Payment will be received later. Paid the first two weeks’ rent by writing Check 287 for $325. Paid the electric bill at a cost of $115, Check 288.

1. Juanita Ortega invested $12,000 cash in her business. 2. Purchased two new whitewater rafts on account for $3,750 from Peak Equipment Inc. 3. Billed, but did not collect, $750 for guide services provided to Mary Johnson. CONTINUE

Chapter 5 Problems

102-129_CH05_868829.indd 124

8/29/05 1:07:44 PM

Problems Date

CHAPT E R 5

Transactions (cont.)

12 14 17 21 24 27 29

Analyze

4. 5. 6. 7. 8.

Repaired a raft at a cost of $123, Check 411. Wrote Check 412 to pay the electric bill of $95. Received $225 for guide service fees. Paid the $225 rent for the month, Check 413. Paid $1,750 toward the rafts bought on account, Check 414. 9. Juanita Ortega withdrew $250 cash for personal use, Check 415. 10. Received guide service fees of $250. Calculate the amount of revenue earned.

Problem 5–7 Analyzing Transactions Greg Failla owns Showbiz Video. He uses the following accounts to record business transactions. General Ledger 101 Cash in Bank 105 Accounts Receivable— Gabriel Cohen 110 Accounts Receivable— James Coletti 140 Computer Equipment 145 Video Tapes

205 Accounts Payable— Computer Horizons 207 Accounts Payable— New Media Suppliers 301 Greg Failla, Capital 305 Greg Failla, Withdrawals 401 Video Rental Revenue 405 VCR Rental Revenue 505 Equipment Repair Expense 520 Rent Expense 530 Utilities Expense

Instructions For each transaction: 1. Prepare a T account for each account listed above. 2. Analyze and record each of the following transactions using the appropriate T accounts. Identify each transaction by number. 3. After recording all transactions, compute a balance for each account. 4. Test for the equality of debits and credits. Date

Jan.

SMART GUIDE Step–by–Step Instructions: Problem 5–7 1. Select the problem set for Showbiz Video (Prob. 5–7). 2. Rename the company and set the system date. 3. Add a new record for each of the general ledger accounts. 4. Print a Chart of Accounts. 5. Proof your work. 6. Complete the Analyze activity manually. 7. End the session.

TIP: Peachtree requires that you group accounts by type: asset, liability, equity, income, and expense.

Transactions

1 3 8 10

1. Greg Failla invested $17,500 cash in Showbiz Video. 2. Purchased computer equipment on account from Computer Horizons for $2,400. 3. Purchased videos on account from New Media Suppliers for $375. 4. Paid monthly rent of $750, Check 1183. CONTINUE

Chapter 5 Problems

102-129_CH05_868829.indd 125

125

8/29/05 1:07:45 PM

Problems

C H A P T ER 5 Date

13 14 16 19 21 22 25 30

Transactions (cont.)

Wrote Check 1184 to pay for new videos, $265. Sent a bill for $67 to Gabriel Cohen for a VCR rental. Deposited the receipts from video rentals, $233. Paid the gas and electric bill of $125, Check 1185. Sent Check 1186 for $375 to New Media Suppliers as payment on account. 10. Greg Failla withdrew $150 for his personal use, Check 1187. 11. Paid $45 for VCR repair, Check 1188. 12. Deposited VCR rental receipts of $264 in the bank.

Analyze SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 5–8 1. Select the spreadsheet template for Problem 5–8. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity manually. 6. Save your work and exit the spreadsheet program.

CHALLENGE PROBLEM

Identify the permanent accounts that have normal credit balances.

Problem 5–8 Completing the Accounting Equation

With the addition of temporary accounts, the basic accounting equation can be expressed as follows: Owner’s Equity Assets  Liabilities  Owner’s Capital  Withdrawals  Revenue  Expenses

Instructions Using the expanded equation shown above, determine the missing amounts for the following accounting equations. Use the form in your working papers. The first equation is completed as an example. Owner’s Assets

 Liabilities  Capital  Withdrawals  Revenue  Expenses

1. $64,400 $8,200 $56,300 $ 500 $10,000 $ 9,600 2. $22,150 525 18,800 1,200 12,100 ? 3. 17,500 75 21,650 ? 4,115 3,250 4. 49,450 ? 47,840 1,500 20,300 17,610 5. 21,900 1,150 20,005 950 ? 16,570 6. 72,640 2,790 ? 10,750 67,908 39,749 7. ? 1,988 41,194 6,196 52,210 42,597 8. ? 3,840 61,774 ? 40,163 21,637 (Expenses plus withdrawals equal $27,749.) 9. 64,070 ? 49,102 4,875 53,166 ? (Total owner’s equity after adding revenue and subtracting expenses and withdrawals is $50,643.)

Analyze

126

5. 6. 7. 8. 9.

For equation 7, calculate the sum of owner’s equity.

Chapter 5 Problems

102-129_CH05_868829.indd 126

4/6/06 5:37:10 PM

Winning Competitive Events

CHAPTER 5

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Which of the following statements is incorrect? a. The normal balance of the receivable account is a debit. b. The normal balance of the owner’s personal account is a debit. c. The normal balance of an unearned revenues account is a credit. d. The normal balance of an expense account is a credit. e. All of the above statements are correct. 2. If Tim Jones, the owner of Jones Hardware proprietorship, uses cash of the business to purchase a family automobile, the business should record this use of cash with an entry to a. debit Salary Expense and credit Cash. b. debit Tim Jones, Salary and credit Cash. c. debit Cash and credit Tim Jones, Withdrawals. d. debit Tim Jones, Capital and credit Cash. e. none of the above.

Business Professionals of America MULTIPLE CHOICE 3. Accounts that are continuous from one accounting period to the next and balances are carried forward are referred to as a. permanent accounts. b. fiscally continuous. c. post-closing assets. d. signature accounts. 4. Each of the following is a business expense except a payment for a. equipment b. advertising c. rent d. utility bills 5. If the owner of a company takes merchandise for personal use, what account is debited? a. Owner’s capital Need More Help? b. Owner’s withdrawals Go to glencoeaccounting.glencoe.com and c. Purchases click on Student Center. Click on Winning d. Cash Competitive Events and select Chapter 5. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

102-129_CH05_868829.indd 127

Chapter 5 Winning Competitive Events

127

10/13/05 9:58:17 PM

C H A P T ER 5 Critical Thinking

Temporary and Permanent Accounts

CASE

STUDY

Service Business: Web Site Design

ETHICS

Using a Toll-Free Number

a mattoefr

128

Real-World Applications and Connections

1. What is the normal balance of the owner’s withdrawals account? 2. What is the difference between owner’s equity and the owner’s capital account? 3. Your business receives a refund check from the utility company because it overcharged your business in the past. Which account is debited? Which account is credited? 4. Which temporary accounts affect profit or loss for an accounting period? 5. Write an equation for owner’s equity at the end of an accounting period. Start the equation with “Beginning Owner’s Capital” and end the equation with “Ending Owner’s Equity.” 6. Evaluate the practice of using temporary accounts for recording certain transactions, as opposed to using the owner’s capital account. Colleen Chapelli owns Web Design Source, a service that creates Web sites for local businesses. While Colleen is an expert with computers and software programming, her business finance expertise is limited. She has hired you as her accountant to organize her business information and suggest business accounts. Here are some of the items Colleen uses in the business: • Computer • Desk and chair • Printer • Bookcases • Software • Computer supplies Colleen has been advertising in the local newspaper to find new clients. She manages the business from her home and has a separate telephone line for the business. INSTRUCTIONS 1. Prepare a chart of accounts for Web Design Source. 2. Explain to Colleen why it is important to collect and organize the financial information resulting from business transactions. Many businesses offer a toll-free telephone line for customers and business associates. Suppose you’re an accountant for Procter & Gamble in Cincinnati, Ohio. Your friend Mike just moved to Houston and asks if your company has an 800 number he can use to call you. Your company does offer an 800 number, and you would like to hear from Mike. However, you also know that your company pays for each incoming call. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Chapter 5 Real-World Applications and Connections

102-129_CH05_868829.indd 128

8/29/05 1:07:50 PM

Real-World Applications and Connections ))

$ )) Communicating ACCOUNTING

Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Promoting an Idea As Southside Ballet Company’s financial director, you think Southside should open a ballet supply and dancewear shop. Use word processing software to write a memo to the ballet director and owner, Jonathan Booth, asking him to consider it. Explain how you view the impact of additional revenue on his capital account. Use the rules for revenue accounts in your explanation.

Acquiring and Analyzing Data To make a decision, whether business or personal, you must be able to acquire and analyze data (information). ON THE JOB You are a senior at Highland College, a small liberal arts college. Eighty percent of the students live in campus dorms or in apartments within one mile of the college. The student activities center closes at 9:00 p.m. during the school week, and students complain about the lack of food and beverage service for late night study sessions. You decide to analyze the market potential of a limited food and beverage delivery service. INSTRUCTIONS 1. Develop a market survey of 5–10 questions related to the opening of an off-campus food and beverage delivery service. 2. Decide what type of food and beverage you can provide in a delivery service. How much investment would you need to begin? What do you anticipate your customer base to be?

Global E-Business When you think about revenue and expenses for a company, consider how the Internet makes it faster and cheaper to do business. Business is conducted using Web sites, e-mail, and videoconferencing. Companies like Gap and K-Mart use Web sites to sell products at lower costs than store locations. Managers can communicate online with vendors or branch locations to avoid the high costs of travel. INSTRUCTIONS If you owned a small business and wished to expand your market to a global audience, discuss how you might use the Internet.

Your Credit Card Do you have a credit card? If you do not use a credit card yet, it is likely you will use one in the future. In either case, you need to know how to use your credit card wisely. PERSONAL FINANCE ACTIVITY Suppose your friend used a credit card unwisely and lost the use of the card. You want to help your friend avoid future mistakes. Conduct research at the library, on the Internet, or at your local bank. Write some suggestions that will be helpful to your friend. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 5.

glencoeaccounting.glencoe.com

102-129_CH05_868829.indd 129

CHAPT E R 5

Chapter 5 Real-World Applications and Connections

129

8/29/05 1:07:53 PM

CH A P T ER 6

Recording Transactions in a General Journal BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the first three steps in the accounting cycle.

2.

Give and describe several examples of source documents.

1. 2. 3. 4.

3.

Explain the purpose of journalizing.

4.

Apply information from source documents.

5.

Describe the steps to make a general journal entry.

Google Inc.

6.

Make general journal entries.

Internet, whether it is for school or just something you find

7.

Correct errors in general journal entries.

interesting. There is a good chance your first stop is Google.

8.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

Every transaction you have with a business is documented in some way. Companies keep permanent records of transactions.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business RECORDING FINANCIAL INFORMATION Think about how often you look for information on the

Larry Page and Sergey Brin were students at Stanford University when they met in 1995. During the next few years, they worked together on Web search technology. They developed a way to do searches using personal computers instead of big, expensive machines. The company Google Inc. was started in a garage in 1998. The site performed about 10,000 searches a day. Within two and one-half years, that number grew to 100 million. Today Google is the top Internet search engine. The company takes in billions of dollars in advertising each year, keeping its team of accountants busy.

What Do You Think? If you were just starting an Internet company, what types of financial information would you record?

130

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 130

4/6/06 5:38:57 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Have you ever kept a daily journal of the things that happen during your day? The general journal of a business is similar. The daily financial happenings are recorded there. A company like Google sells advertising, invests in computer equipment, and pays software engineers. You will learn how to record business transactions in a journal in this chapter.

glencoeaccounting.glencoe.com

130-161_CH06_868829.indd 131

Personal Connection 1. In your workplace, why is it important to keep accurate records of daily transactions? 2. List five business transactions that happen in your workplace.

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 6.

131

4/6/06 5:39:03 PM

The Accounting Cycle

SECTION 1

BEFORE YOU

In earlier chapters you learned to use the accounting equation and T accounts to analyze business transactions. In this chapter you will learn how to record business transactions in a journal.

READ

Main Idea

The Steps of the Accounting Cycle

The accounting cycle is a series of steps done in each accounting period to keep records in an orderly fashion.

What Is the Accounting Cycle? The accounting period of a business is separated into activities called the accounting cycle . These activities help the business keep its accounting records in an orderly fashion. Take a look at Figure 6–1, which describes accounting activities and their sequence. In this chapter you will use Steps 1, 2, and 3 of the accounting cycle:

Read to Learn…

➤ the steps in the accounting cycle. (p. 132) ➤ the different types of accounting periods. (p. 134)

Key Terms accounting cycle source document invoice receipt memorandum

1. Collect and verify source documents. 2. Analyze each transaction. 3. Journalize each transaction.

check stub journal journalizing fiscal year calendar year

After studying Chapters 3 through 10, you will have covered the entire accounting cycle for a service business organized as a sole proprietorship. Analyze each transaction

Collect and verify source documents

ACCOUNT DEBIT

ACCOUNT

2

DEBIT

1

POST-CLOSING TRIAL BALANCE

9 GENERAL JOURNAL

Figure 6–1 Steps in the Accounting Cycle with Steps 1, 2, 3 Highlighted 132

Prepare a post-closing trial balance

GENERAL JOURNAL

CREDIT

INVOICE RECEIPT MEMORANDUM

Journalize each transaction

8

LEDGER

Journalize and post closing entries

3

CREDIT

7

Post to the ledger LEDGER

4 6

5 TRIAL BALANCE

WORK SHEET

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER'S EQUITY

BALANCE SHEET

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 132

9/13/05 4:25:51 PM

The First Step in the Accounting Cycle: Collecting and Verifying Source Documents

AS YOU

Most business transactions take place during the daily operations of a business. In the course of one day, a business may pay its rent, place an ad in a local newspaper, contract to have a Web site created, pay its employees, sell products, and purchase new equipment. When a business transaction occurs, a paper is prepared as evidence of that transaction. This paper is a source document . There are several types of source documents that can be prepared by hand, by computer, or by a machine. The type of source document prepared depends on the nature of the transaction. Figure 6–2 describes and illustrates commonly used source documents.

Invoice Lists specific information about a business transaction involving the buying or selling of an item on account. The invoice contains the date of the transaction; the quantity, description, and cost of each item; and the payment terms.

Receipt A record of cash received by a business. It indicates the date the payment was received, the name of the person or business from whom the payment was received, and the amount of the payment.

Memorandum A brief written message that describes a transaction that takes place within a business. A memorandum is often used if no other source document exists for the business transaction.

Check Stub The check stub lists the same information that appears on a check: the date written, the person or business to whom the check was written, and the amount of the check. The check stub also shows the balance in the checking account before and after each check is written.

3

Source Documents Source documents are evidence of business transactions.

DATE: ORDER NO.: SHIPPED BY: TERMS:

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

QTY.

Key Point

INVOICE NO. 479

KELLY’S OFFICE SUPPLIES 354 Circle Drive. #150 Santa Monica, CA 90405 TO

READ

ITEM

Dec. 1, 20-150 Truck Payable in 30 days TOTAL

UNIT PRICE

$ 99.00

Office Chairs

$ 297.00

RECEIPT

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

No. 2 20 --

Nov. 26 RECEIVED FROM Greer's Market

$ 200.00 DOLLARS

Two hundred and no/100 FOR Deliveries 11/26/20-RECEIVED BY

Maria Sanchez

Roadrunner Delivery Service

MEMORANDUM 1

155 Gateway Blvd. Sacramento, CA 94230

TO: FROM: DATE: SUBJECT:

Accounting Clerk Maria Sanchez October 1, 20-Contributed personal funds to the business

I have contributed $25,000 from my personal savings to be deposited to the business, Roadrunner Delivery Service.

$ Date To For

250.00 November 2 Info-Systems fax/modem

No. 110 20 --

Dollars Balance brought forward

Cents

25,000 00

Add deposits

Total Less this check Balance carried forward

25,000 00 250 00 24,750 00

Figure 6–2 Source Documents Section 1 The Accounting Cycle

130-161_CH06_868829.indd 133

133

9/13/05 4:25:54 PM

The business owner, accountant, or accounting clerk (depending on the size of the business) uses source documents generated by business transactions to keep the records of the business. The accounting cycle starts by collecting and verifying the accuracy of source documents. One important activity is to check the arithmetic on each source document.

The Second Step in the Accounting Cycle: Analyzing Business Transactions After collecting and verifying source documents, the second step in the accounting cycle can begin—analyzing information on the source documents to determine the debit and credit parts of each transaction. You have already learned how to analyze business transactions using the rules of debit and credit. When you learned to analyze transactions, you were given a description of each transaction, such as: Roadrunner Delivery Service bought a computer system from Info-Systems Inc. for $3,000 and issued Check 101 in payment. On the job you will not get a description of the transaction. Instead, you must examine a source document to determine what occurred during a business transaction.

AS YOU

READ

It's Not What It Seems Journal In your

personal life, a journal can be a private diary of your thoughts and experiences. In accounting a journal is a formal record of business transactions.

The Third Step in the Accounting Cycle: Recording Business Transactions in a Journal You are now ready to apply information from source documents. The third step in the accounting cycle is to record the debit and credit parts of each business transaction in a journal. A journal is a record of the transactions of a business. Journals are kept in chronological order, that is, the order in which the transactions occur. The process of recording business transactions in a journal is called journalizing . Keeping a journal can be compared to keeping a diary in which all important events are written. A journal is the only place where complete details of a transaction, including both the debit and credit parts, are recorded. The journal is sometimes called the book of original entry because it is where transactions are first entered in the accounting system.

The Accounting Period What Are the Different Types of Accounting Periods?

Connect to…

HISTORY

In 1494 Franciscan monk Luca Pacioli published a mathematics book that included a section on double-entry accounting. In his book Pacioli described most of the accounting cycle as we know it today.

134

As discussed in Chapter 2, accounting records are summarized for a certain period of time, called an accounting period. An accounting period may be for any designated length of time, such as a month, a quarter, or a year. Most businesses use a year as their accounting period. An accounting period of 12 months is called a fiscal year . If the fiscal year for a business begins on January 1 and ends on December 31, it is called a calendar year accounting period. Many businesses start their accounting periods in months other than January. For example, department stores often have fiscal years that begin on February 1 and end on January 31 of the following year. School districts usually have fiscal years that begin on July 1 and end on June 30.

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 134

4/6/06 5:39:19 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Create a table similar to this one to describe how the first three steps of the accounting cycle help organize the records of a business.

3TEP.UMBER

(OW4HIS3TEP(ELPS/RGANIZE "USINESS2ECORDS

3TEP$ESCRIPTION

Do the Math Glen’s Catering received an invoice from Conover Restaurant Suppliers for the following supplies: • 6 cartons of napkins at $4.88 per carton

• 3 boxes of salt packets at $3.19 per box

• 3 boxes of paper plates at $7.28 per box

• 4 boxes of medium paper cups at $8.24 per box

Calculate the total for each item on the invoice. Then calculate the total for all items.

Problem 6–1 Analyzing a Source Document Instructions Analyze the invoice shown below and answer the following questions. JAYMAX OFFICE SUPPLY 554 Town Square Fort Myers, FL 33902

TO

Dario’s Accounting Services 5821 Gulf Blvd. Naples, FL 33940

QTY.

1

1. 2. 3. 4. 5. 6. 7.

ITEM

Fax Machine

INVOICE NO. 479 DATE: ORDER NO.: SHIPPED BY: TERMS:

Apr. 9, 20-Truck Payable in 30 days

UNIT PRICE

TOTAL

$ 299.00

$ 299.00

What is the name of the company providing the service or merchandise? What is the name of the business receiving the service or merchandise? What is the date of the invoice? What is the invoice number? What item was sold? What is the price for this item? What are the payment terms? Section 1 The Accounting Cycle

130-161_CH06_868829.indd 135

135

9/13/05 4:26:03 PM

SECTION 2

BEFORE YOU

Recording Transactions in the General Journal In Section 1 you learned about the first three steps in the accounting cycle. Let’s apply these steps to business transactions for Roadrunner Delivery Service.

READ

Main Idea

Recording a General Journal Entry

You can use the general journal to record all of the transactions of a business.

How Do You Record a General Journal Entry? Many kinds of accounting journals are used in business. One of the most common is the general journal. As its name suggests, the general journal is an all-purpose journal in which all of the transactions of a business may be recorded. Figure 6–3 shows the general journal you will be using throughout the accounting cycle for Roadrunner Delivery Service. The general journal has two amount columns. The first amount column, the amount column on the left, is used to record debit amounts. (Remember that debit means left.) The second amount column, the amount column on the right, is used to record credit amounts. (Remember that credit means right.) Look at Figure 6–3 to find where each component of a general journal entry appears.

Read to Learn… ➤ how to record a general journal entry. (p. 136) ➤ how to correct errors in the general journal. (p. 148)

Key Terms general journal

1 Date of the transaction 2 Name of the account debited

3 Amount of the debit

GENERAL JOURNAL DATE 1

AS YOU

READ

Instant Recall Normal Debit Balance Assets Expenses Owner’s Withdrawals Normal Credit Balance Liabilities Revenue Owner’s Capital

136

2 3 4

DESCRIPTION

POST. REF.

Year Month Day Debited Account Name Credited Account Name Explanation

PAGE DEBIT

CREDIT 1

1 0 0 0 00

5

2

1 0 0 0 00

3 4 5

6 Source document reference or an explanation

4 Name of the account credited

5 Amount of the credit

Figure 6–3 General Journal for Roadrunner Delivery Service In Chapters 4 and 5, you learned a step-by-step method for analyzing business transactions. In this chapter you will learn to complete the journal entry for a business transaction in the same manner. Review the following steps before you continue.

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 136

9/13/05 4:26:05 PM

B u s i n e s s Tr a n s a c t i o n BUSINESS TRANSACTION ANALYSIS: Steps to Success ANALYSIS

Identify Classify
/

1. Identify the accounts affected. 2. Classify the accounts affected. 3. Determine the amount of increase or decrease for each account affected.

DEBIT-CREDIT RULE

4. Which account is debited? For what amount? 5. Which account is credited? For what amount?

T ACCOUNTS

6. What is the complete entry in T-account form?

JOURNAL ENTRY

7.

What is the complete entry in general journal form?

Use these steps to determine the debit and credit parts of each journal entry. Remember, it is always helpful to use T accounts to analyze transactions. After analyzing many transactions, you will find that you need these tools less and less to determine the debit and credit parts of a journal entry. After the complete entry is recorded, verify that the total debits and total credits are equal. Now, let’s examine business transactions and their analysis for Roadrunner Delivery Service. Roadrunner Delivery Service

B u s i n e s s Tr a n s a c t i o n 1 On October 1 Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service, Memorandum 1. ANALYSIS

Identify

Classify
/

DEBIT-CREDIT RULE

MEMORANDUM 1

155 Gateway Blvd. Sacramento, CA 94230

TO: FROM: DATE: SUBJECT:

Accounting Clerk Maria Sanchez October 1, 20-Contributed personal funds to the business

I have contributed $25,000 from my personal savings for a deposit to the business, Roadrunner Delivery Service.

1. The accounts Cash in Bank and Maria Sanchez, Capital are affected. 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s capital account. 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000.

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5. Increases in the owner’s capital account are recorded as credits. Credit Maria Sanchez, Capital for $25,000.

Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 137

137

9/13/05 4:26:08 PM

6.

T ACCOUNTS

Debit
25,000

JOURNAL ENTRY

Maria Sanchez, Capital

Cash in Bank

Debit 

Credit 

7.

Credit
25,000

GENERAL JOURNAL DATE 1 2

20-Oct.

3 4

POST. REF.

DESCRIPTION

PAGE DEBIT

1

CREDIT 1

1 Cash in Bank Maria Sanchez, Capital Memorandum 1

25 0 0 0 00

2

25 0 0 0 00

3 4

Look again at the general journal entry shown above. Notice that in the upper right-hand corner there is a line for the page number. Journal pages are numbered in consecutive order; that is, 1, 2, 3, and so on. When you fill one page with journal entries, go on to the next page. Be sure to properly number each new page. Roadrunner Delivery Service

B u s i n e s s Tr a n s a c t i o n 2 On October 2 Maria Sanchez took two telephones valued at $200 each from her home and transferred them to the business as office equipment, Memorandum 2. ANALYSIS

Identify

Classify
/

MEMORANDUM 2

155 Gateway Blvd. Sacramento, CA 94230

TO: FROM: DATE: SUBJECT:

Accounting Clerk Maria Sanchez October 2, 20-Contributed personal phones

I have contributed two telephones from my home to the business. The phones are valued at $200 each. Total contribution  $400.

1. The accounts Office Equipment and Maria Sanchez, Capital are affected. 2. Office Equipment is an asset account. Maria Sanchez, Capital is an owner’s capital account. 3. Office Equipment is increased by $400. Maria Sanchez, Capital is increased by $400.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Office Equipment for $400. 5. Increases in owner’s capital accounts are recorded as credits. Credit Maria Sanchez, Capital for $400.

T ACCOUNTS

6.

Office Equipment Debit
400

138

Credit 

Maria Sanchez, Capital Debit 

Credit
400

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 138

9/13/05 4:26:11 PM

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

5

Oct.

POST. REF.

DESCRIPTION

2 Office Equipment Maria Sanchez, Capital Memorandum 2

6 7

1

PAGE DEBIT

CREDIT

4 0 0 00

5

4 0 0 00

6 7

8

8

$

B u s i n e s s Tr a n s a c t i o n 3

Date To

On October 4 Roadrunner issued Check 101 for $3,000 to buy a computer system.

For

Dollars Balance brought forward

ANALYSIS

Identify

Classify


/

No. 101 20 --

3,000.00 October 4 Info-Systems Inc. computer

Cents

25,000 00

Add deposits 1. The accounts Computer Equipment and Cash in Bank are affected. 25,000 Total 2. Computer Equipment and 3,000 Less this check Cash in Bank are asset 22,000 Balance carried forward accounts. 3. Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000.

00 00 00

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Computer Equipment for $3,000. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $3,000.

T ACCOUNTS

6.

Computer Equipment Debit
3,000

JOURNAL ENTRY

7.

Cash in Bank

Credit 

Debit


Credit  3,000

GENERAL JOURNAL DATE 8 9 10

Oct.

DESCRIPTION

4 Computer Equipment Cash in Bank Check 101

POST. REF.

PAGE DEBIT

1

CREDIT

3 0 0 0 00

8

3 0 0 0 00

11

11

Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 139

9 10

139

9/13/05 4:26:12 PM

INVOICE NO. 200

North Shore Auto 440 Lake Drive Sacramento, CA 94230

B u s i n e s s Tr a n s a c t i o n 4 On October 9 Roadrunner bought a used truck on account from North Shore Auto for $12,000, Invoice 200. ANALYSIS

Identify

Classify
/

DATE: ORDER NO.: SHIPPED BY: TERMS:

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

TO

QTY.

1

ITEM

Dodge Truck Used

Oct. 9, 20-99674 n/a Installment

UNIT PRICE

TOTAL

$ 12,000.00

$ 12,000.00

1. The accounts Delivery Equipment and Accounts Payable—North Shore Auto are affected. 2. Delivery Equipment is an asset account. Accounts Payable—North Shore Auto is a liability account. 3. Delivery Equipment is increased by $12,000. Accounts Payable— North Shore Auto is increased by $12,000.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Delivery Equipment for $12,000. 5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—North Shore Auto for $12,000.

T ACCOUNTS

6. Debit
12,000

JOURNAL ENTRY

Credit 

7.

11 12 13

Oct.

DESCRIPTION

9 Delivery Equipment Accts. Pay.—North Shore Auto Invoice 200

14

READ

In Your Own Words On Account In Business

Transaction 4, Roadrunner “bought a used truck on account… .” What does this mean?

140

Debit 

Credit
12,000

GENERAL JOURNAL DATE

AS YOU

Accounts Payable— North Shore Auto

Delivery Equipment

POST. REF.

PAGE DEBIT

1

CREDIT

12 0 0 0 00

11

12 0 0 0 00

12 13 14

To separate the amounts to be paid to individual creditors, Roadrunner uses a different account name for each creditor. The account name consists of Accounts Payable followed by the name of the creditor. You may have to abbreviate the name to fit it on one line of the journal. An acceptable abbreviation in the preceding journal entry is Accts. Pay.—North Shore Auto. Roadrunner uses the same naming system for the amounts to be paid by individual customers. The account name consists of Accounts Receivable followed by the customer’s name.

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 140

9/13/05 4:26:17 PM

Roadrunner Delivery Service

B u s i n e s s Tr a n s a c t i o n 5 On October 11 Roadrunner sold one telephone on account to Green Company for $200, Memorandum 3. ANALYSIS

Identify

Classify
/

MEMORANDUM 3

155 Gateway Blvd. Sacramento, CA 94230

TO: FROM: DATE: SUBJECT:

Accounting Clerk Maria Sanchez October 11, 20-Sold telephone

Sold one telephone on account to Green Company for $200.

1. The accounts Accounts Receivable— Green Company and Office Equipment are affected. 2. Both accounts are asset accounts. 3. Accounts Receivable—Green Company is increased by $200. Office Equipment is decreased by $200.

DEBIT-CREDIT RULE

4. Debit Accounts Receivable—Green Company for $200. 5. Credit Office Equipment for $200.

T ACCOUNTS

6.

Accounts Receivable— Green Company Debit
200

JOURNAL ENTRY

7.

Office Equipment Credit  200

Debit


Credit 

GENERAL JOURNAL DATE

14 15 16

POST. REF.

DESCRIPTION

PAGE DEBIT

Oct. 11 Accts. Rec.—Green Company Office Equipment Memorandum 3

1

CREDIT

2 0 0 00

14

2 0 0 00

16

17

17

$

B u s i n e s s Tr a n s a c t i o n 6

Date

On October 12 Roadrunner mailed Check 102 for $350 as the first installment on the truck purchased from North Shore Auto on October 9.

To For

Identify

Classify


/

1. The accounts Accounts Payable— North Shore Auto and Cash in Bank are affected. 2. Accounts Payable—North Shore Auto is a liability account. Cash in Bank is an asset account. 3. Both accounts are decreased by $350.

No. 102 20 --

350.00 October 12 North Shore Auto installment on truck Dollars

Balance brought forward

ANALYSIS

Cents

22,000 00

Add deposits

Total Less this check Balance carried forward

22,000 00 350 00 21,650 00

Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 141

15

141

9/13/05 4:26:21 PM

DEBIT-CREDIT RULE

4. Debit Accounts Payable—North Shore Auto for $350. 5. Credit Cash in Bank for $350.

T ACCOUNTS

6.

Accounts Payable— North Shore Auto Debit  350

JOURNAL ENTRY

Cash in Bank

Credit


7.

Credit  350

Debit


GENERAL JOURNAL DATE

17 18 19

DESCRIPTION

POST. REF.

1

PAGE DEBIT

Oct. 12 Accts. Pay.—North Shore Auto Cash in Bank Check 102

CREDIT

3 5 0 00

17

3 5 0 00

19

20

20

RECEIPT

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

B u s i n e s s Tr a n s a c t i o n 7

Identify Classify
/

No. 1

RECEIVED FROM Green Company

$ 200.00

Two hundred and no/100

DOLLARS

FOR Telephone RECEIVED BY

Maria Sanchez

1. The accounts Cash in Bank and Accounts Receivable—Green Company are affected. 2. Cash in Bank is an asset account. Accounts Receivable—Green Company is an asset account. 3. Cash in Bank is increased by $200. Accounts Receivable—Green Company is decreased by $200.

DEBIT-CREDIT RULE

4. Debit Cash in Bank for $200. 5. Credit Accounts Receivable—Green Company for $200.

T ACCOUNTS

6.

Cash in Bank Debit
200

142

20 --

Oct. 14

On October 14 Roadrunner received and deposited a check for $200 from Green Company, Receipt 1. The check is full payment for the telephone sold on account to Green on October 11. ANALYSIS

18

Credit 

Accounts Receivable— Green Company Debit


Credit  200

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 142

9/13/05 4:26:22 PM

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

20 21 22

DESCRIPTION

1

PAGE

POST. REF.

DEBIT

Oct. 14 Cash in Bank Accts. Rec.—Green Company Receipt 1

CREDIT

2 0 0 00

20

2 0 0 00

21 22

23

23

RECEIPT

Roadrunner Delivery Service

B u s i n e s s Tr a n s a c t i o n 8

155 Gateway Blvd. Sacramento, CA 94230

On October 15 Roadrunner provided delivery services for Sims Corporation. A check for $1,200 was received in full payment, Receipt 2.

No. 2 20 --

Oct. 15 RECEIVED FROM Sims Corporation

$ 1,200.00

One thousand two hundred and no/100

DOLLARS

FOR Delivery services

ANALYSIS

Identify

Classify
/

RECEIVED BY

Maria Sanchez

1. The accounts Cash in Bank and Delivery Revenue are affected. 2. Cash in Bank is an asset account. Delivery Revenue is a revenue account. 3. Cash in Bank is increased by $1,200. Delivery Revenue is increased by $1,200.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $1,200. 5. Increases in revenue accounts are recorded as credits. Credit Delivery Revenue for $1,200.

T ACCOUNTS

6. Debit
1,200

JOURNAL ENTRY

Delivery Revenue

Cash in Bank

7.

Credit 

Credit
1,200

Debit 

GENERAL JOURNAL DATE

23 24 25

DESCRIPTION

Oct. 15 Cash in Bank Delivery Revenue Receipt 2

POST. REF.

PAGE DEBIT

1

CREDIT

1 2 0 0 00

23

1 2 0 0 00

26

25 26

Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 143

24

143

9/13/05 4:26:29 PM

B u s i n e s s Tr a n s a c t i o n 9

700.00 No. 103 October 16 20 -Tooley & Co. Management rent

$ Date

On October 16 Roadrunner mailed Check 103 for $700 to pay the month’s rent.

To For

Dollars

ANALYSIS

Identify Classify
/

1. The accounts Rent Expense and Cash in Bank are affected. 2. Rent Expense is an expense. Cash in Bank is an asset. 3. Rent Expense is increased by $700. Cash in Bank is decreased by $700.

Cents

21,650 00

Balance brought forward Add deposits 10/14

200 00

10/15

1,200 00 23,050 00

Total

700 00

Less this check

22,350 00

Balance carried forward

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Rent Expense for $700. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $700.

T ACCOUNTS

6.

Rent Expense Debit
700

JOURNAL ENTRY

Cash in Bank

Credit 

7.

Credit  700

Debit


GENERAL JOURNAL DATE

POST. REF.

DESCRIPTION

Oct. 16 Rent Expense Cash in Bank Check 103

PAGE DEBIT

1

CREDIT

7 0 0 00

26

7 0 0 00

27 28 29

ACON BE

B u s i n e s s Tr a n s a c t i o n 1 0

Advertising

TO

On October 18 Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later, Invoice 129. ANALYSIS

Identify

Classify
/

144

Beacon Advertising 10200 Prairie Parkway Sacramento, CA 94206

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

QTY.

1

ITEM

Print Ad

INVOICE NO. 129 DATE: ORDER NO.: SHIPPED BY: TERMS:

Oct. 18, 20-699 n/a Payable in 30 days

UNIT PRICE

TOTAL

$ 75.00

$ 75.00

1. The accounts Advertising Expense and Accounts Payable—Beacon Advertising are affected. 2. Advertising Expense is an expense account. Accounts Payable— Beacon Advertising is a liability account. 3. Advertising Expense is increased by $75. Accounts Payable—Beacon Advertising is increased by $75.

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 144

9/13/05 4:26:31 PM

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Advertising Expense for $75. 5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—Beacon Advertising for $75.

T ACCOUNTS

6.

Debit
75

JOURNAL ENTRY

Accounts Payable— Beacon Advertising

Advertising Expense Credit 

7.

Credit
75

Debit 

GENERAL JOURNAL DATE

29 30 31

DESCRIPTION

1

PAGE

POST. REF.

DEBIT

Oct. 18 Advertising Expense Accts. Pay.—Beacon Adv. Invoice 129

CREDIT

7 5 00

29

7 5 00

31

32

32

SALES INVOICE NO. 1

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

B u s i n e s s Tr a n s a c t i o n 1 1 On October 20 Roadrunner provided delivery services for a customer, City News. Roadrunner billed City News $1,450, Sales Invoice 1. ANALYSIS

Identify

Classify
/

30

City News 10900 Main St. Sacramento, CA 94230

TO

QTY.

1

DATE: ORDER NO.: SHIPPED BY: TERMS:

ITEM

Delivery Services

Oct. 20, 20-300 n/a Payable in 30 days

UNIT PRICE

TOTAL

$ 1,450.00

$ 1,450.00

1. The accounts Accounts Receivable—City News and Delivery Revenue are affected. 2. Accounts Receivable—City News is an asset account. Delivery Revenue is a revenue account. 3. Accounts Receivable—City News is increased by $1,450. Delivery Revenue is increased by $1,450.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Accounts Receivable—City News for $1,450. 5. Increases in revenue accounts are recorded as credits. Credit Delivery Revenue for $1,450.

T ACCOUNTS

6.

Accounts Receivable—City News Debit
1,450

Credit 

Delivery Revenue Debit 

Credit
1,450

Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 145

145

9/13/05 4:26:34 PM

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

32 33 34

POST. REF.

DESCRIPTION

Oct. 20 Accts. Rec.—City News Delivery Revenue Sales Invoice 1

1

PAGE DEBIT

CREDIT

1 4 5 0 00

32

1 4 5 0 00

34

35

35

B u s i n e s s Tr a n s a c t i o n 1 2

$

On October 28 Roadrunner paid a $125 telephone bill with Check 104. ANALYSIS

Identify Classify


/

33

Date To For

1. The accounts Utilities Expense and Cash in Bank are affected. 2. Utilities Expense is an expense account. Cash in Bank is an asset account. 3. Utilities Expense is increased by $125. Cash in Bank is decreased by $125.

No. 104 20 --

125.00 October 28 Pacific Bell Telephone telephone bill Dollars

Balance brought forward

Cents

22,350 00

Add deposits

22,350 00

Total

125 00

Less this check Balance carried forward

22,225 00

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Utilities Expense for $125. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $125.

T ACCOUNTS

6.

Utilities Expense Debit
125

JOURNAL ENTRY

Credit 

7.

Credit  125

Debit


GENERAL JOURNAL DATE

35 36 37

DESCRIPTION

Oct. 28 Utilities Expense Cash in Bank Check 104

38

146

Cash in Bank

POST. REF.

PAGE DEBIT

1

CREDIT

1 2 5 00

35

1 2 5 00

36 37 38

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 146

9/13/05 4:26:35 PM

$

B u s i n e s s Tr a n s a c t i o n 1 3

Date

On October 29 Roadrunner wrote Check 105 for $600 to have the office repainted.

To For

Dollars Balance brought forward

ANALYSIS

Identify

Classify


/

No. 105 20 --

600.00 October 29 Rainbow Painting office painted

1. The accounts Maintenance Add deposits Expense and Cash in Bank are affected. Total 2. Maintenance Expense is an Less this check expense account. Cash in Bank is an asset account. Balance carried forward 3. Maintenance Expense is increased by $600. Cash in Bank is decreased by $600.

Cents

22,225 00

22,225 00 600 00 21,625 00

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Maintenance Expense for $600. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $600.

T ACCOUNTS

6.

Debit
600

JOURNAL ENTRY

Cash in Bank

Maintenance Expense

7.

Credit  600

Debit


Credit 

GENERAL JOURNAL DATE

38 39 40

POST. REF.

DESCRIPTION

Oct. 29 Maintenance Expense Cash in Bank Check 105

PAGE DEBIT

1

CREDIT

6 0 0 00

38

6 0 0 00

40

41

41

$

B u s i n e s s Tr a n s a c t i o n 1 4

Date To

On October 31 Maria Sanchez wrote Check 106 to withdraw $500 cash for personal use.

For

ANALYSIS

Classify


/

No. 106 20 --

500.00 October 31 Maria Sanchez withdrawal Dollars

Balance brought forward

Identify

1. The accounts Maria Sanchez, Add deposits Withdrawals and Cash in Bank are affected. Total 2. Maria Sanchez, Withdrawals is Less this check an owner’s withdrawals account. Balance carried forward Cash in Bank is an asset account. 3. Maria Sanchez, Withdrawals is increased by $500. Cash in Bank is decreased by $500.

Cents

21,625 00

21,625 00 500 00 21,125 00

Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 147

39

147

9/13/05 4:26:38 PM

DEBIT-CREDIT RULE

4. Increases in the owner’s withdrawals account are recorded as debits. Debit Maria Sanchez, Withdrawals for $500. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $500.

T ACCOUNTS

6.

Maria Sanchez, Withdrawals Debit
500

Credit 

7.

JOURNAL ENTRY

Cash in Bank Credit  500

Debit


GENERAL JOURNAL DATE

41 42 43

DESCRIPTION

POST. REF.

Oct. 31 Maria Sanchez, Withdrawals Cash in Bank Check 106

PAGE DEBIT

1

CREDIT

5 0 0 00

41

5 0 0 00

42 43

44

44

Correcting the General Journal How Do You Correct Errors in the General Journal? Occasionally, errors occur when journalizing transactions. When an error is discovered, it must be corrected. In a manual system, an error should never be erased. An erasure looks suspicious. It might be seen as an attempt to cover up a mistake or, worse, to change the accounting records illegally. To correct errors, use a pen and a ruler to draw a horizontal line through the entire incorrect item and write the correct information above the crossed-out error. A correction for an erroneous amount is shown in the general journal as follows: GENERAL JOURNAL DATE

AS YOU

READ

Compare and Contrast Journal Errors What are the consequences of an error in an amount? In an account name? How are the consequences similar? How are they different?

1 2

1

3 4

POST. REF.

DEBIT

1

CREDIT 1

25 0 0 0 00

Cash in Bank Maria Sanchez, Capital Memorandum 1

52 0 0 0 00

25 0 0 0 00

52 0 0 0 00

2 3 4

To correct for an erroneous account name, cross out the incorrect information and write the correct account name above. GENERAL JOURNAL DATE 1 2 3 4

148

20-Oct.

DESCRIPTION

PAGE

20-Oct.

DESCRIPTION

POST. REF.

PAGE DEBIT

1

CREDIT 1

1

Cash in Bank Maria Sanchez, Capital Delivery Revenue Memorandum 1

25 0 0 0 00

2

25 0 0 0 00

3 4

Chapter 6 Recording Transactions in a General Journal

130-161_CH06_868829.indd 148

9/13/05 4:26:39 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Think of three different types of business transactions you might have in the next month. Use a table similar to this one to describe the general journal entry for each transaction.

Business Transaction

First Line of General Journal Entry

Second Line of General Journal Entry

Third Line of General Journal Entry

Do the Math Hania Dance Company bought a computer system on account from Tech World. The regular price for the system is $3,000, but Tech World reduced the price by 20 percent for a storewide sale. Answer the following questions about the journal entry for this transaction. 1. Which account is debited and for what amount? 2. Which account is credited and for what amount?

Problem 6–2 Recording Business Transactions Instructions The six steps for recording a business transaction in the general journal are shown below, out of order. In your working papers or on a blank sheet of paper, indicate the proper order of these steps. A. Amount of the credit D. Date of the transaction B. Name of the account credited E. Amount of the debit C. Source document reference F. Name of the account debited

Problem 6–3 Analyzing Transactions Glenda Hohn recently started a day-care center. She uses the following accounts. General Ledger Cash in Bank Accts. Rec.—Tiny Tots Nursery Office Furniture Passenger Van Accts. Pay.—Acme Bus Service

Glenda Hohn, Capital Glenda Hohn, Withdrawals Day-Care Fees Utilities Expense Van Expense

Instructions In your working papers or on a separate sheet of paper, for each transaction: Determine which accounts are affected. Classify each account. Determine whether the accounts are being increased or decreased. Indicate which account is debited and which account is credited.

Transactions: 1. Bought a passenger van for cash. 2. Paid the telephone bill for the month. 3. Received cash from customers for day-care services. Section 2 Recording Transactions in the General Journal

130-161_CH06_868829.indd 149

149

9/13/05 4:26:43 PM

Summary

CH A P T ER 6 Key Concepts

1. The accounting cycle is pictured below. The first three steps are highlighted: Step 1: Collect and verify source documents. Step 2: Analyze each transaction. Step 3: Journalize each transaction. Analyze each transaction

Collect and verify source documents

ACCOUNT DEBIT

ACCOUNT

2

DEBIT

1

POST-CLOSING TRIAL BALANCE

9 GENERAL JOURNAL

Prepare a post-closing trial balance

GENERAL JOURNAL

CREDIT

INVOICE RECEIPT MEMORANDUM

Journalize each transaction

8

3

CREDIT

7 BALANCE SHEET

Journalize and post closing entries

LEDGER

4 6

5 TRIAL BALANCE

WORK SHEET

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER'S EQUITY

LEDGER

Post to the ledger

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

2. Source documents are evidence of business transactions. Four examples of source documents are listed below. Invoice Receipt Memorandum

➤ ➤ ➤ ➤

describes the buying or selling of an item on account describes cash received by a business describes a transaction that takes place within a business

describes a specific check and shows the checking account balance Check Stub 3. Businesses use journals to keep records of transactions in the order they occur. The process of recording transactions in a journal is 250.00 No. 110 $ November 2 20 -Date called journalizing. Info-Systems To fax/modem 4. Source documents contain the information needed for journalizing For transactions. The check stub shown to the right is a source Dollars Cents document. The highlighted information is used to make the Balance brought forward 25,000 00 journal entry. Add deposits Total Less this check Balance carried forward

150

25,000 00 250 00 24,750 00

Chapter 6 Summary

130-161_CH06_868829.indd 150

9/13/05 4:26:49 PM

Summary

CHAPT E R 6

5. Follow six steps to make a general journal entry: GENERAL JOURNAL DATE 1

PAGE POST. REF.

DESCRIPTION

(2) Account to Debit (4) Account to Credit (6) Source Document Reference

(1) Date

2 3

DEBIT

CREDIT

(3) Debit Amt.

1

(5) Credit Amt.

2 3

4

4

6. Notice how information is applied from the source document (Check Stub 110) to the general journal. GENERAL JOURNAL DATE 1 2

20-Nov.

POST. REF.

DESCRIPTION

1

PAGE DEBIT

CREDIT 1

2

3 4

Office Equipment Cash in Bank Check 110

2 5 0 00

2

2 5 0 00

3 4

7. In a manual system, never erase a general journal error. The procedure to correct an error is shown below. GENERAL JOURNAL DATE 1 2

20-Nov.

POST. REF.

DESCRIPTION

2

3 4

1

PAGE DEBIT

CREDIT 1

Office Equipment

2 5 0 00

Maintenence Expense Cash in Bank Check 110

2

2 5 0 00

3 4

Key Terms accounting cycle

(p. 132)

journal

(p. 134)

calendar year

(p. 134)

journalizing

(p. 134)

check stub

(p. 133)

memorandum

(p. 133)

fiscal year

(p. 134)

receipt

(p. 133)

general journal

(p. 136)

source document

(p. 133)

invoice

(p. 133)

Chapter 6 Summary

130-161_CH06_868829.indd 151

151

9/13/05 4:26:52 PM

C H A P T ER 6 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

Accounting Cycle a. List the first three steps of the accounting cycle. b. What would happen if you skipped Step 2? Source Documents a. List four source documents and describe the contents of each. b. Explain when each source document is used. Journalizing a. Why is a journal sometimes called the book of original entry? b. What is the purpose of recording transactions in a journal? Applying Information a. Where do you get the information needed to make a journal entry? b. How do you determine the debit and credit parts of a journal entry? Steps to Make a General Journal Entry a. What six types of information are included in each general journal entry? b. In what order do you record this information? Making General Journal Entries a. How are the two amount columns of the general journal used to record dollar amounts? b. Describe the spacing of the information in the Description column. Correcting General Journal Errors a. What procedure is used to correct a general journal entry error in a manual system? b. What are the possible consequences of erasing an error in the general journal?

Apply Key Terms Assume you are an accountant who keeps financial records for small businesses. Write a one-page newsletter that you might send to potential clients describing the importance of accounting records. Use each of the terms below in your newsletter. accounting cycle calendar year check stub fiscal year general journal invoice

152

journal journalizing memorandum receipt source document

Chapter 6 Review and Activities

130-161_CH06_868829.indd 152

9/13/05 4:26:56 PM

Computerized Accounting

CHAPT E R 6

General Journal Entries Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Recording general journal entries

• Analyze the source document to determine which accounts are affected. • Using a general journal form, enter the details of the transaction. • Check for equality of debits and credits.

• Analyze the source document to determine which accounts are affected. • Enter the transaction details in the general journal using the account numbers for each ledger account. • The software will calculate the equality of debits and credits.

Q&A Peachtree Question How do I enter general journal entries in Peachtree?

Answer 1. 2. 3. 4. 5. 6. 7. 8. 9.

From the Tasks menu, select General Journal Entry. Enter the date of the transaction. Enter the source document reference. Enter the account number to be debited. Enter a brief description of the transaction. Enter the debit amount. Enter the account number to be credited. Enter the credit amount. Click Save.

QuickBooks Q & A QuickBooks Question How do I enter general journal entries in QuickBooks?

Answer 1. 2. 3. 4. 5. 6. 7.

From the Company menu, select Make General Journal Entries. Enter the date of the transaction. Enter the account to be debited. Enter the debit amount, source document reference, and description. Enter the account to be credited. Enter the credit amount, source document reference, and description. Click Save & Close.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 6 Computerized Accounting

130-161_CH06_868829.indd 153

153

9/13/05 4:27:00 PM

Problems

C H A P T ER 6 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 6–4 1. Select the problem set for Wilderness Rentals (Prob. 6–4). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions using the General Journal Entry option in the Tasks menu. 4. Print a General Journal report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 6–4 1. Restore the Problem 6-4.QBB file. 2. Enter all of the general journal transactions using the Make General Journal Entries option in the Company menu. 3. Print a Journal report. 4. Proof your work and make any needed corrections. 5. Complete the Analyze activity. 6. Back up your work.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 6–4 Recording General Journal Transactions Ronald Hicks owns and operates Wilderness Rentals. The following accounts are needed to journalize the month’s transactions. General Ledger 101 Cash in Bank 105 Accts. Rec.—Helen Katz 110 Accts. Rec.—Polk and Co. 120 Office Equipment 125 Camping Equipment 201 Accts. Pay.—Adventure Equipment Inc. 203 Accts. Pay.—Digital Tech Computers 205 Accts. Pay.—Greg Mollaro

Ronald Hicks, Capital Ronald Hicks, Withdrawals Income Summary Equipment Rental Revenue Advertising Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense

Instructions: Record the following transactions on page 1 of the general journal in your working papers. For each transaction: 1. Enter the date. Use the current year. 2. Enter the name of the account debited. 3. Enter the amount of the debit. 4. Enter the name of the account credited. 5. Enter the amount of the credit. 6. Enter a source document reference. Date

Jan.

Transactions

1 Wrote Check 310 for the part-time secretary’s salary, $270. 3 Bought $2,000 of camping equipment on account from Adventure Equipment Inc., Invoice 320. 5 Received $500 from a client for equipment rental, Receipt 150. 7 Wrote Check 311 to pay the electricity bill of $110. 11 Billed a client, Polk and Co., $1,700 for rental equipment, Sales Invoice 262. 12 Ronald Hicks withdrew $800 for personal use, Check 312. 14 Bought a $300 scanner for the office computer from Digital Tech Computers, on account, Invoice 270. 16 Wrote Check 313 for $1,000 as an installment payment toward the amount owed to Adventure Equipment Inc. 25 Received $1,700 from Polk and Co. in payment on their account, Receipt 151. 30 Paid Digital Tech Computers $300 for the amount owed, Check 314.

Analyze 154

301 305 310 401 501 505 515 520 525

Calculate the amount of cash deducted from the Cash in Bank account in January.

Chapter 6 Problems

130-161_CH06_868829.indd 154

9/13/05 4:27:02 PM

Problems

CHAPT E R 6

Problem 6–5 Recording General Journal Transactions Regina Delgado owns a business called Hot Suds Car Wash. She uses the following chart of accounts. General Ledger 101 Cash in Bank 401 105 Accts. Rec.—Linda Brown 405 110 Accts. Rec.—Valley Auto 410 125 Office Equipment 501 130 Office Furniture 505 135 Car Wash Equipment 510 201 Accts. Pay.—Allen 520 Vacuum Systems 525 205 Accts. Pay.—O’Brian’s 530 Office Supply 301 Regina Delgado, Capital 305 Regina Delgado, Withdrawals 310 Income Summary

Wash Revenue Wax Revenue Interior Detailing Revenue Advertising Expense Equipment Rental Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense

Instructions: Record the following transactions on page 1 of the general journal in your working papers. Date

Jan.

Transactions

1 Regina Delgado invested $12,000 in the business, Memorandum 41. 5 Purchased $5,000 in desks, chairs, and cabinets from O’Brian’s Office Supply on account, Invoice 1632. 8 Deposited $1,600 for income received from car washes for the week, Receipt 101. 10 Paid the Village Bulletin $75 for running an ad, Check 301. 13 Regina Delgado withdrew $900 for personal use, Check 302. 17 Billed Valley Auto $400 for interior detailing, Sales Invoice 102. 18 Paid O’Brian’s Office Supply $2,500 as an installment payment on account, Check 303. 20 Regina Delgado transferred to the business an electronic calculator valued at $350, Memorandum 42. 22 Wrote Check 304 for $600 to Shadyside Realty for the office rent. 24 Purchased $1,500 in car wash equipment from Allen Vacuum Systems on account, Invoice 312. 26 Received a $400 check from Valley Auto in full payment of its account, Receipt 102. 30 Issued Check 305 for $2,500 to O’Brian’s Office Supply for the balance due on account.

Analyze

SMART GUIDE Step–by–Step Instructions: Problem 6–5 1. Select the problem set for Hot Suds Car Wash (Prob. 6–5). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions using the General Journal Entry option in the Tasks menu. 4. Print a General Journal report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

TIP: You can use General Ledger Navigation Aid as an alternative way to access the General Journal Entry window.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 6–5 1. Restore the Problem 6-5.QBB file. 2. Enter all of the general journal transactions using the Make General Journal Entries option in the Company menu. 3. Print a Journal report. 4. Proof your work and make any needed corrections. 5. Complete the Analyze activity. 6. Back up your work.

Identify the revenue account that was not used in the month of January.

Chapter 6 Problems

130-161_CH06_868829.indd 155

155

9/13/05 4:27:04 PM

Problems

C H A P T ER 6

Problem 6–6 Recording General Journal Transactions SMART GUIDE Step–by–Step Instructions: Problem 6–6 1. Select the problem set for Kits & Pups Grooming (Prob. 6–6). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions. 4. Print a General Journal report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

TIP: As a shortcut, you can enter just the day of the month for a transaction date.

Abe Shultz owns and operates a pet grooming business called Kits & Pups Grooming. The following accounts are used to journalize transactions. General Ledger 101 Cash in Bank 105 Accts. Rec.—Juan Alvarez 110 Accts. Rec.—N. Carlsbad 115 Accts. Rec.—Martha Giles 125 Office Equipment 130 Office Furniture 135 Computer Equipment 140 Grooming Equipment 145 Kennel Equipment 201 Accts. Pay.—Able Store Equipment 205 Accts. Pay.—Dogs & Cats Inc.

Accts. Pay.—Pet Gourmet Abe Shultz, Capital Abe Shultz, Withdrawals Income Summary Boarding Revenue Grooming Revenue Advertising Expense Equipment Repair Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense

Instructions: Record the following transactions on page 7 of the general journal in your working papers. Date

Jan.

Transactions

1 Received $125 for boarding a client’s dog for one week, Receipt 300. 3 Abe Shultz contributed to the business a computer valued at $2,500, Memorandum 33. 5 Billed a client, Juan Alvarez, $80 for grooming his pets, Sales Invoice 212. 9 Wrote Check 411 to Allegheny Power Co. for $150 in payment for the month’s electricity bill. 11 Abe Shultz withdrew $700 for personal use, Check 412. 14 Purchased kennel equipment for $2,600 from Dogs & Cats Inc., on account, Invoice DC92. 16 Paid the part-time receptionist’s salary of $400 by issuing Check 413. 18 Abe Shultz took from the business for his personal use a ten-key adding machine valued at $65, Memorandum 34. 23 Juan Alvarez sent a check for $80 in full payment of his account, Receipt 301. 28 Purchased on credit $250 in grooming equipment from the Pet Gourmet, Invoice PG333. 31 Issued Check 414 for $1,300 as an installment payment for the amount owed to Dogs & Cats Inc.

Analyze

156

207 301 305 310 401 405 501 505 510 520 525 530

Calculate the total of the Accounts Receivable accounts as of January 31.

Chapter 6 Problems

130-161_CH06_868829.indd 156

9/13/05 4:27:05 PM

Problems

CHAPT E R 6

Problem 6–7 Recording General Journal Transactions Juanita Ortega is the owner of Outback Guide Service. The following accounts are used to record the transactions of her business. General Ledger 101 Cash in Bank 105 Accts. Rec.—M. Johnson 110 Accts. Rec.—Feldman, Jones & Ritter 115 Accts. Rec.—Podaski Systems Inc. 130 Office Equipment 135 Office Furniture 140 Computer Equipment 145 Hiking Equipment 150 Rafting Equipment 201 Accts. Pay.—A-1 Adventure Warehouse

205 207 301 302 310 401 501 505 515 520 525

Accts. Pay.—Peak Equipment Inc. Accts. Pay.—Premier Processors Juanita Ortega, Capital Juanita Ortega, Withdrawals Income Summary Guide Service Revenue Advertising Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense

Instructions: Record the following transactions on page 1 of the general journal in your working papers. Date

Jan.

Transactions

SMART GUIDE Step–by–Step Instructions: Problem 6–7 1. Select the problem set for Outback Guide Service (Prob. 6–7). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions. 4. Print a General Journal report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

TIP: Press SHIFT+? in an Account No. field to display an account list.

1 Juanita Ortega contributed the following assets to her business: cash, $1,500; hiking equipment, $2,000; rafting equipment, $2,500; and office furniture, $500; Memorandum 21. 2 Issued Check 515 to Town News for a $75 ad. 4 Purchased $3,000 in rafting equipment on account from A-1 Adventure Warehouse, Invoice AW45. 6 A group from Feldman, Jones & Ritter went on a hiking trip. The group was billed $4,800 for guide services, Sales Invoice 300. 10 Paid $300 to Dunn’s Painting and Interior Co. for painting the office, Check 516. 13 Made a $1,000 payment to A-1 Adventure Warehouse toward the amount owed, Check 517. 15 Received a check for $4,800 from Feldman, Jones & Ritter in payment of their account, Receipt 252. 18 Juanita Ortega paid herself $600 by issuing Check 518. 22 Billed a client, Mary Johnson, $1,200 for completing guide services on a hiking expedition, Sales Invoice 301. 25 Paid the monthly telephone bill for $175 by issuing Check 519. 30 Purchased a $3,600 computer system from Premier Processors. Made a down payment for $1,800 and agreed to pay the balance within 30 days, Check 520 and Invoice 749.

Analyze

Generalize about Outback’s cash sales and credit sales.

Chapter 6 Problems

130-161_CH06_868829.indd 157

157

9/13/05 4:27:07 PM

Problems

C H A P T ER 6 CHALLENGE PROBLEM

SOURCE DOCUMENT PROBLEM Problem 6–8 Use the source documents in your working papers to complete this problem.

SMART GUIDE Step–by–Step Instructions: Problem 6–8 1. Select the problem set for Showbiz Video (Prob. 6–8). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions. 4. Print a General Journal report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

Greg Failla operates Showbiz Video. The following accounts are used to record business transactions. General Ledger 101 Cash in Bank 105 Accts. Rec.—G. Cohen 110 Accts. Rec.—J. Coletti 113 Accts. Rec.—S. Flannery 115 Accts. Rec.—Spring Branch School District 130 Office Equipment 135 Office Furniture 140 Computer Equipment 145 Video Tapes 150 Video Equipment 201 Accts. Pay.—Broad Street Office Supply 205 Accts. Pay.—Computer Horizons

207 209 301 305 310 401 405 501 505 510 520 525 530

Accts. Pay.—New Media Suppliers Accts. Pay.—Palace Films Greg Failla, Capital Greg Failla, Withdrawals Income Summary Video Rental Revenue VCR Rental Revenue Advertising Expense Equipment Repair Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense

Instructions: Record the following transactions on page 5 of the general journal in your working papers. Date

Jan.

Transactions

1 Deposited $3,400 in receipts. Of that amount, $1,900 was VCR rentals and $1,500 was video tape rentals, Receipt 435. 3 Wrote Check 1250 for $325 of equipment repairs. 5 Purchased $400 in video tapes from Palace Films on account, Invoice PF32. 7 Bought from New Media Suppliers $2,600 in video equipment. Made a down payment of $600 and agreed to pay the balance in two installments, Check 1251 and Invoice NM101. 10 Rented videos to Spring Branch School District. The school district agreed to pay $1,800 at a later date, Sales Invoice 1650. 12 Issued Check 1252 for $750 to Computer Horizons for the amount owed to them. 15 Deposited $5,600 in receipts. VCR rentals amounted to $4,400 and video tape rentals were $1,200, Receipt 436. 18 Paid Clear Vue Window Cleaners $100 for monthly window cleaning, Check 1253. 25 Made a $1,000 installment payment toward the amount owed to New Media Suppliers by issuing Check 1254.

Analyze

158

Problem 6–8 Recording General Journal Transactions

Calculate the total expenses incurred in January.

Chapter 6 Problems

130-161_CH06_868829.indd 158

9/13/05 4:27:08 PM

Winning Competitive Events

CHAPTER 6

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Recording account information in chronological order is called a. posting. b. journalizing. c. analyzing. d. processing. 2. Every journal consists of four parts: a. account title, date, post reference, amount. b. date, debit, credit, source document. c. date, page number, debit, credit. d. date, post reference, debit, credit. 3. The amount of each asset in an opening entry is recorded in a journal in the a. General Debit column. b. General Credit column. c. both a and b. d. neither a nor b. 4. An example of a business document that indicates a transaction has occurred is a. a journal. b. a ledger. c. a memo. d. a balance sheet.

Business Professionals of America MULTIPLE CHOICE 5. The source document used when a customer makes a payment on his/her account owed would be a a. sales invoice. b. check. c. receipt. d. memorandum.

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 6. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

130-161_CH06_868829.indd 159

Chapter 6 Winning Competitive Events

159

10/13/05 10:05:24 PM

C H A P T ER 6 Critical Thinking

General Journal Entries

CASE

STUDY

Service Business: Exercise and Fitness

ETHICS

Gossip in the Workplace

a mattoefr

160

Real-World Applications and Connections

1. What term describes any accounting period of 12 months? 2. How is the general journal entry for a cash purchase different from the entry for a purchase on account? 3. It is your first day on a new job. Your task is to journalize transactions. You just sat at your desk, which is covered with papers. What do you do next? 4. Compare a general journal entry to a transaction recorded in T accounts. How is it similar? How is it different? 5. What items do you need to complete each of the first three steps of the accounting cycle? Include office supplies and forms as well as any information that will be needed. 6. What is the value of keeping the record of business transactions in chronological order? Elena Rodriguez started a business offering an exercise facility and personal physical training. Elena has hired you as a financial consultant to help her set up her accounting system. She has rented a space for her business, purchased several exercise machines, and hired a part-time exercise instructor. Elena’s clients can either pay a fee for each visit or purchase a membership. INSTRUCTIONS 1. Write a plan for Elena Rodriguez explaining the types of financial information she needs to record. Describe the source documents that might be a part of her business. For example, should Elena send invoices to her non-membership clients or ask them to pay at each visit? Describe why it is important for Elena to record both the cost of doing business and the income from the business. 2. Suggest a chart of accounts for Elena’s business. Assume that you are an accounting clerk for a large insurance company like Farmers Insurance. Your boss introduces you to the newest hire, and you recognize her as a former classmate from high school named Sally. You remember that Sally had been suspended from school for a series of locker thefts. During lunch you consider telling other co-workers about Sally’s history. You also wonder if your boss knows. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Chapter 6 Real-World Applications and Connections

130-161_CH06_868829.indd 160

9/13/05 4:27:12 PM

Real-World Applications and Connections ))

$ )) Communicating ACCOUNTING

Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

CHAPT E R 6

Describing Source Documents Write a paragraph describing the content of invoices, check stubs, memorandums, and receipts. Explain how to verify and analyze these source documents before an entry is made in the journal.

Creative Thinking Congratulations! You have been chosen as the local Business Owner of the Year! Write a one-page press release describing your business and why you have been successful. Be sure to include a brief description of your business, the skills you use in running a successful business, and how you plan to continue being successful in the future.

Dating Documents Source documents from different countries can have different date formats: United States Australia Date written out July 6, 2010 6 July 2010 Abbreviation 7/6/10 6/7/10 Format MM/DD/YY DD/MM/YY As you can see in this example, writing out the month prevents confusion. The International Organization for Standardization (ISO) promotes the worldwide use of a single format: YYYY-MM-DD. INSTRUCTIONS Write the date February 17, 2010, using the ISO recommended format.

Making It

Personal

Your Personal Finance Records Your day-to-day source documents are personal financial records. Personal financial records also include documents that are not related to everyday transactions. Vehicle titles, birth certificates, and tax returns are all personal financial documents. You can store your financial documents in home files, a home safe, or a safe-deposit box. You can also keep some financial records on a home computer. PERSONAL FINANCE ACTIVITY Imagine a person your age who drives to a part-time job and has a credit card. Make a list of the types of records Transactions in Sports and documents such a person would probably The general journal can be used have. Create a plan that describes which records to record all types of transactions. and documents to store and where to store Visit glencoeaccounting them. .glencoe.com and click on Student Center. Click on PERSONAL FINANCE ONLINE Log on to WebQuest and select Unit 2 to glencoeaccounting.glencoe.com and click continue your Internet project. on Student Center. Click on Making It Personal and select Chapter 6.

glencoeaccounting.glencoe.com

130-161_CH06_868829.indd 161

Chapter 6 Real-World Applications and Connections

161

4/6/06 5:40:03 PM

CH A P T ER 7

Posting Journal Entries to General Ledger Accounts BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe the steps in the posting process.

2.

Post general journal entries.

3.

Prepare a trial balance.

1. 2. 3. 4.

4.

Locate and correct trial balance errors.

5.

Record correcting entries in the general journal.

6.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

Up-to-date account balances provide information for reports used by people both inside and outside the business.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ACCOUNTS AND THE GENERAL LEDGER

Los Angeles Angels of Anaheim In the big-money world of professional sports, it is hard to imagine the new owner of a major team actually lowering the prices of tickets, food, and souvenirs. That is exactly what Arturo “Arte” Moreno did when he bought baseball’s Los Angeles Angels of Anaheim in 2003. Moreno was a big hit with fans for his lower-price strategy. In his first year, the Angels attracted 750,000 more paying customers than in the previous season, when they won the World Series. Moreno has been called “the people’s owner” because he likes to meet fans and enjoys seeing families having a good time. “For baseball to exist as I’ve known it, the kids have to come to the park,” he told USA Today.

What Do You Think? What are some general ledger accounts that might be used by the Angels?

162

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 162

9/16/05 5:54:49 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE In the last chapter, you learned how to record financial transactions in a journal. These journal entries show individual daily activities but do not show the total of all transactions. In this chapter you will learn that posting the journal entries is a means of organizing all transactions affecting the accounts of a business.

glencoeaccounting.glencoe.com

162-191_CH07_868829.indd 163

Personal Connection What types of accounts would you imagine are used for accounting in your workplace?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 7.

163

9/16/05 5:55:04 PM

SECTION 1

BEFORE YOU

READ

Main Idea

The general ledger is a permanent record organized by account number.

Read to Learn…

➤ how to set up the general ledger. (p. 164) ➤ how managers use journals and ledgers. (p. 166)

The General Ledger In Chapter 6 you learned to analyze business transactions and enter those transactions in a general journal. In this chapter you will learn to post journal entries to the general ledger and to prepare a trial balance (Steps 4 and 5 in the accounting cycle illustrated in Figure 7–1). Posting is the process of transferring information from the journal to individual general ledger accounts. The Jeep dealer in your area records all business transactions in the journal and posts them to the general ledger. An up-to-date ledger allows the dealer’s accountant to give management information such as sales of vehicles, service income, and salary and commission expense. Analyze each transaction

Collect and verify source documents

ACCOUNT DEBIT +

ACCOUNT DEBIT +

2

MEMORANDUM

1

posting general ledger ledger account forms POST-CLOSING TRIAL BALANCE

9 GENERAL JOURNAL

Figure 7–1 The Accounting Cycle with Steps 4 and 5 Highlighted

Prepare a post-closing trial balance

GENERAL JOURNAL

CREDIT -

INVOICE RECEIPT

Key Terms

Journalize each transaction

3

CREDIT -

8

7

LEDGER

4

6

5 TRIAL BALANCE

WORK SHEET

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER'S EQUITY

LEDGER

Journalize and post closing entries

Post to the ledger

BALANCE SHEET

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

Setting Up the General Ledger What Is a General Ledger? Recall that the accounts used by a business are kept on separate pages or cards in a book or file called a ledger. In a computerized accounting system, the electronic files containing the accounts are still referred to as the ledger, or the ledger accounts. In either system the ledger is often called a general ledger. The general ledger is a permanent record organized by account number. 164

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 164

9/16/05 5:55:24 PM

Posting journal entries to the ledger accounts creates a record of the impact of business transactions on each account used by a business. After journal entries have been posted, a business owner or manager can easily find the current balance of a specific account. If, for example, Maria Sanchez wants to know how much money Roadrunner Delivery Service has in its bank account, she can look at the balance of the Cash in Bank account.

The Four-Column Ledger Account Form In a manual accounting system, information about specific accounts is recorded in ledger account forms . There are several common ledger account forms. These forms and other accounting stationery are usually described by the number of their amount columns. The number of columns refers only to those columns in which dollar amounts are recorded. Roadrunner uses the four-column ledger account form shown in Figure 7–2. The four-column ledger account form has spaces to enter the account name, the account number, the date, a description of the entry, and the posting reference. It also has four columns in which to record dollar amounts: Debit, Credit, Debit Balance, and Credit Balance. ACCOUNT DATE

ACCOUNT NO. DESCRIPTION

POST. REF.

BALANCE DEBIT

CREDIT

Debit and credit amounts are posted from journal entries to the first two amount columns. The new account balance is entered in one of the last two amount columns. The type of account (expense, revenue, asset, etc.) determines which balance column to use. For example, accounts with a normal debit balance—such as asset or expense accounts—use the Debit Balance column. Accounts with a normal credit balance—such as liability or revenue accounts—use the Credit Balance column.

Accounts in the Ledger Before journal entries can be posted, a general ledger account is opened for each account listed on the chart of accounts. Opening a General Ledger Account. Two steps are required: 1. Write the account name at the top of the ledger account form. 2. Write the account number on the ledger account form. These two steps are performed each time a ledger page is needed for a new account. The accounts opened for the first three asset accounts on Roadrunner’s chart of accounts (page 79) are shown in Figure 7–3 on page 166. The procedure in a computerized accounting system is similar. An account is opened by entering its name and number from the chart of accounts. Computerized accounting systems vary, but all require entering information such as the account numbers and names into the computer files.

DEBIT

CREDIT

Figure 7–2 Four-Column Ledger Account Form

CULTURAL Diversity Business Etiquette

Americans shake hands with a firm grip to show confidence. In some cultures, however, a firm handshake can be considered a sign of aggression. In many countries the grip is limp and it can last up to 10 seconds. If you meet someone from a different culture, let him or her set the precedent.

Section 1 The General Ledger

162-191_CH07_868829.indd 165

165

9/16/05 5:55:29 PM

ACCOUNT Cash in Bank DATE

ACCOUNT NO. 101 DEBIT

CREDIT

DEBIT

CREDIT

ACCOUNT Accounts Receivable—City News DATE

2

BALANCE

POST. REF.

DESCRIPTION

POST. REF.

DESCRIPTION

ACCOUNT NO. 105 BALANCE DEBIT

CREDIT

DEBIT

CREDIT

1 ACCOUNT Accounts Receivable—Green Company DATE

Figure 7–3 Opening General Ledger Accounts with Zero Balances

DESCRIPTION

POST. REF.

ACCOUNT NO. 110 BALANCE

DEBIT

CREDIT

DEBIT

CREDIT

Starting a New Page for an Existing Account. When a ledger account page is filled, continue posting on the next page. Six steps are required to “open” a new page: 1. 2. 3. 4. 5.

Write the account name at the top of the ledger account form. Write the account number on the ledger account form. Enter the complete date (year, month, and day) in the Date column. Write the word Balance in the Description column. Place a check mark (✓) in the Posting Reference column to show the amount entered on this line is not being posted from a journal. 6. Enter the balance in the appropriate Balance column. Usually asset, expense, and owner’s withdrawals accounts have debit balances. Liability, owner’s capital, and revenue accounts have credit balances.

Figure 7–4 shows an example of a new page opened for an account. ACCOUNT Cash in Bank DATE

3 20-Oct.

1

ACCOUNT NO. 101

DESCRIPTION

31 Balance 4

Figure 7– 4 Starting a New Page for an Existing Account

POST. REF.

5

2

BALANCE DEBIT

✓

CREDIT

DEBIT

CREDIT

6

21 1 2 5 00

The Usefulness of Journals and Ledgers How Are These Records Useful to Managers? Managers continually use the information from accounting records. To find information about a specific business transaction, a manager can refer to the journal entry. To learn the current balance of important accounts like Accounts Receivable and Accounts Payable, managers look at the general ledger. Managers use ledgers to obtain summarized information.

166

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 166

4/6/06 5:40:51 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Use a chart like this one to compare and contrast a journal and a ledger. Add answer lines as needed.

*OURNAL

,EDGER (OWARETHEYALIKE

(OWARETHEYDIFFERENT

Do the Math The general ledger for Reese Delivery Service contains the following account balances: Cash in Bank $ 8,000 Supplies $ 200 Delivery Equipment ? Ed Reese, Capital $16,200 Delivery Income ? Using the following clues, determine the balances of the Delivery Equipment account and the Delivery Income account: • Total debits equal $24,200. • The balance of the Delivery Income account is one-half the balance of the Delivery Equipment account.

Problem 7–1 Opening Ledger Accounts Instructions Use the step-by-step processes presented in this chapter for starting new ledger pages for the following accounts. Use the accounting stationery provided in your working papers. January 1 of the current year is the date. Account Name

Account Number

Balance

Cash in Bank

101

$10,000

Accounts Receivable— Mark Cohen

104

2,000

Accounts Payable— Jenco Industries

203

1,000

Tom Torrie, Capital

301

35,000

Admissions Revenue

401

-0Section 1 The General Ledger

162-191_CH07_868829.indd 167

167

9/16/05 5:55:35 PM

SECTION 2

BEFORE YOU

READ

Main Idea

Posting is the process of transferring information from the journal to individual accounts in the ledger.

Read to Learn… ➤ how to post transactions

to the general ledger. (p. 168) ➤ how to compute account balances. (p. 174)

AS YOU

READ

Instant Recall Journal The journal is sometimes called the book of original entry.

The Posting Process In the last section, you learned how to open accounts in the general ledger. In this section you will learn how to post general journal entries to the ledger. Recall that posting is the process of transferring information from the general journal to individual general ledger accounts. To provide current information to management, the accountant for the Jeep dealer in your area probably posts journal entries to the general ledger every day.

The Fourth Step in the Accounting Cycle: Posting How Do You Post Transactions? In Chapter 6 you learned that the general journal is a sort of business diary containing all of the transactions of a business. It is not easy to see the effect of changes in an account by looking at journal entries. To provide a clear picture of how a business transaction changes an account’s balance, the information in a journal entry is posted to the general ledger. The purpose of posting, therefore, is to show the impact of business transactions on the individual accounts. The ledger is sometimes called the book of final entry. The size of the business, the number of transactions, and whether the accounting system is manual or computerized all affect how often posting occurs. Ideally, businesses post daily to keep their accounts up-to-date. Regardless of how often posting is performed, the process remains the same. As in journalizing a transaction, posting to a ledger account is completed from left to right. Let’s look at a journal entry for Roadrunner that is ready to be posted to the ledger.

Posting to the Roadrunner General Ledger Roadrunner’s first transaction affects two accounts: Cash in Bank and Maria Sanchez, Capital. The information in the journal entry is transferred item by item from the journal to each of the accounts affected. As you read about each step in the posting process, refer to Figure 7–5. Locate the account to be debited in the ledger; in this example, Cash in Bank is to be debited.

168

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 168

9/16/05 5:55:38 PM

GENERAL JOURNAL DATE 1 2

20-Oct.

3 4

DESCRIPTION

POST. REF.

PAGE DEBIT

1

CREDIT 1

1 Cash in Bank Maria Sanchez, Capital Memorandum 1

101 301

25 0 0 0 00

2

25 0 0 0 00

6 Enter the account

3

number in the general journal Post. Ref. column

4

5

5

1 Enter date of the journal entry

3 Enter journal letter

2 Description column is usually blank

and page number in Post. Ref. column

5 Compute the new account balance

4 Enter the debit amount

ACCOUNT Cash in Bank DATE

20-Oct.

DESCRIPTION

1

ACCOUNT NO. 101 POST. REF.

G1

BALANCE DEBIT

CREDIT

DEBIT

25 0 0 0 00

CREDIT

25 0 0 0 00

7 Repeat steps 1–6 for the

credit part of journal entry

ACCOUNT Maria Sanchez, Capital DATE

20-Oct.

DESCRIPTION

1

ACCOUNT NO. 301 POST. REF.

BALANCE DEBIT

G1

CREDIT

DEBIT

25 0 0 0 00

CREDIT

25 0 0 0 00

Figure 7–5 Posting from the General Journal to Ledger Accounts 1. Enter the date of the journal entry in the Date column of the account debited. Use the date of the journal entry, not the date on which the posting is done. Write the year and month in the left side of the Date column. It is not necessary to write the year and month for other postings to the same account on the same page unless the month or year changes. The day, however, is always entered. 2. The Description column on the ledger account is usually left blank. Some businesses use this space to write in the source document number. 3. In the ledger account Posting Reference (Post. Ref.) column, identify where the journal entry is recorded. Enter a letter for the specific journal and the journal page number. In this example the letter “G” represents the general journal and the “1” indicates page 1 of the general journal. 4. Enter the debit amount in the Debit column of the ledger account. 5. Compute and record the new account balance in the appropriate balance column. Every amount posted will either increase or decrease the balance of that account.

Section 2 The Posting Process

162-191_CH07_868829.indd 169

169

4/6/06 5:41:01 PM

AS YOU

READ

Key Point Posting to General Ledger Accounts For every journal entry, you will post to at least two ledger accounts.

6. Return to the journal and, in the Posting Reference column, enter the account number of the ledger account to which you just posted the debit part of the journal entry. Be sure it is entered on the same line as the debit entry. In this example enter 101 in the Posting Reference column on the line for Cash in Bank. This step in the posting process is very important. The notation in the Posting Reference column of the journal indicates that the journal entry has been posted. The posting reference also shows the account to which the entry was posted. If the posting process is interrupted, perhaps by a telephone call, the posting reference signals the point at which posting stopped. Never write an account number in the Posting Reference column until after you have posted. 7. Repeat steps 1–6 for the credit part of the journal entry. • Locate the account to be credited. In this example Maria Sanchez, Capital, is to be credited. • Enter the date. • Enter the posting reference on the ledger account form. In this example, G1 represents the first page of the general journal. • Enter the credit amount. • Compute the new account balance. • Enter the account number in the Posting Reference column of the general journal. In the example enter 301 to show that the credit was posted to Maria Sanchez, Capital. The journal entries made in Chapter 6 for Roadrunner’s transactions are shown in Figure 7–6.

The Importance of Posting Posting organizes business transaction details into the proper accounts. As discussed earlier, transactions that are itemized in the general journal are helpful, but do not summarize similar transactions into the same location. Posting summarizes all business transactions so managers can see the cumulative effects on accounts like Utilities Expense or Salaries Expense.

General Journal Utilities Salaries

Repairs

170

Revenue

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 170

4/6/06 5:41:02 PM

GENERAL JOURNAL DATE 1 2

20-Oct.

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

DESCRIPTION

PAGE POST. REF.

DEBIT

1

CREDIT 1

1 Cash in Bank Maria Sanchez, Capital Memorandum 1 2 Office Equipment Maria Sanchez, Capital Memorandum 2 4 Computer Equipment Cash in Bank Check 101 9 Delivery Equipment Accounts Payable—North Shore Auto Invoice 200 11 Accounts Receivable—Green Co. Office Equipment Memorandum 3 12 Accounts Payable—North Shore Auto Cash in Bank Check 102 14 Cash in Bank Accounts Receivable—Green Co. Receipt 1 15 Cash in Bank Delivery Revenue Receipt 2 16 Rent Expense Cash in Bank Check 103 18 Advertising Expense Accounts Payable—Beacon Advertising Invoice 129 20 Accounts Receivable—City News Delivery Revenue Sales Invoice 1 28 Utilities Expense Cash in Bank Check 104 29 Maintenance Expense Cash in Bank Check 105 31 Maria Sanchez, Withdrawals Cash in Bank Check 106

101 301

25 0 0 0 00

120 301

4 0 0 00

115 101

3 0 0 0 00

2

25 0 0 0 00

3 4 5

4 0 0 00

6 7 8

3 0 0 0 00

9 10

125 205

12 0 0 0 00

110 120

2 0 0 00

205 101

3 5 0 00

101 110

2 0 0 00

101 401

1 2 0 0 00

510 101

7 0 0 00

501 201

7 5 00

105 401

1 4 5 0 00

515 101

1 2 5 00

505 101

6 0 0 00

302 101

5 0 0 00

11

12 0 0 0 00

12 13 14

2 0 0 00

15 16 17

3 5 0 00

18 19 20

2 0 0 00

21 22 23

1 2 0 0 00

24 25 26

7 0 0 00

27 28 29

7 5 00

30 31 32

1 4 5 0 00

33 34 35

1 2 5 00

36 37 38

6 0 0 00

39 40 41

5 0 0 00

42 43

44

44

Figure 7–6 General Journal Entries for October Business Transactions The postings made to the general ledger accounts from these entries are shown in Figure 7–7 on pages 172–173. Study these illustrations to check your understanding of the posting process.

Section 2 The Posting Process

162-191_CH07_868829.indd 171

171

9/16/05 5:55:49 PM

ACCOUNT Cash in Bank DATE

20-Oct.

DESCRIPTION

1 4 12 14 15 16 28 29 31

ACCOUNT NO. 101 BALANCE

POST. REF.

DEBIT

G1 G1 G1 G1 G1 G1 G1 G1 G1

CREDIT

DEBIT

25 22 21 21 23 22 22 21 21

25 0 0 0 00 3 0 0 0 00 3 5 0 00 2 0 0 00 1 2 0 0 00 700 125 600 500

00 00 00 00

CREDIT

000 000 650 850 050 350 225 625 125

00 00 00 00 00 00 00 00 00

ACCOUNT Accounts Receivable—City News DATE

BALANCE

POST. REF.

DESCRIPTION

20-Oct. 20

ACCOUNT NO. 105

DEBIT

G1

CREDIT

DEBIT

1 4 5 0 00

CREDIT

1 4 5 0 00

ACCOUNT Accounts Receivable—Green Company DATE

DESCRIPTION

20-Oct. 11 14

ACCOUNT NO. 110 BALANCE

POST. REF.

DEBIT

G1 G1

CREDIT

DEBIT

2 0 0 00

CREDIT

2 0 0 00 2 0 0 00

ACCOUNT Computer Equipment DATE

20-Oct.

DESCRIPTION

4

BALANCE

POST. REF.

G1

ACCOUNT NO. 115 DEBIT

CREDIT

DEBIT

3 0 0 0 00

CREDIT

3 0 0 0 00

ACCOUNT Office Equipment DATE

20-Oct.

DESCRIPTION

2 11

ACCOUNT NO. 120 BALANCE

POST. REF.

DEBIT

G1 G1

CREDIT

DEBIT

4 0 0 00

4 0 0 00 2 0 0 00

2 0 0 00

ACCOUNT Delivery Equipment DATE

20-Oct.

DESCRIPTION

9

ACCOUNT NO. 125 BALANCE

POST. REF.

G1

DEBIT

CREDIT

DEBIT

12 0 0 0 00

20-Oct. 18

DESCRIPTION

POST. REF.

CREDIT

12 0 0 0 00

ACCOUNT Accounts Payable—Beacon Advertising DATE

CREDIT

ACCOUNT NO. 201 BALANCE

DEBIT

G1

CREDIT

7 5 00

DEBIT

CREDIT

7 5 00

Figure 7–7 Postings to General Ledger Accounts for the Month of October 172

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 172

9/16/05 5:55:51 PM

ACCOUNT Accounts Payable—North Shore Auto DATE

20-Oct.

DESCRIPTION

9 12

ACCOUNT NO. 205 BALANCE

POST. REF.

DEBIT

G1 G1

CREDIT

DEBIT

CREDIT

12 0 0 0 00

12 0 0 0 00 11 6 5 0 00

3 5 0 00

ACCOUNT Maria Sanchez, Capital DATE

20-Oct.

DESCRIPTION

1 2

ACCOUNT NO. 301 BALANCE

POST. REF.

DEBIT

CREDIT

G1 G1

DEBIT

CREDIT

25 0 0 0 00 4 0 0 00

25 0 0 0 00 25 4 0 0 00 ACCOUNT NO. 302

ACCOUNT Maria Sanchez, Withdrawals DATE

DESCRIPTION

20-Oct. 31

BALANCE

POST. REF.

DEBIT

G1

CREDIT

DEBIT

5 0 0 00

CREDIT

5 0 0 00

ACCOUNT Income Summary DATE

DESCRIPTION

ACCOUNT NO. 303 BALANCE

POST. REF.

DEBIT

CREDIT

DEBIT

CREDIT

ACCOUNT Delivery Revenue DATE

ACCOUNT NO. 401 BALANCE

POST. REF.

DESCRIPTION

20-Oct. 15 20

DEBIT

CREDIT

G1 G1

DEBIT

CREDIT

1 2 0 0 00 1 4 5 0 00

1 2 0 0 00 2 6 5 0 00

ACCOUNT Advertising Expense DATE

DESCRIPTION

20-Oct. 18

ACCOUNT NO. 501 BALANCE

POST. REF.

DEBIT

G1

CREDIT

DEBIT

7 5 00

CREDIT

7 5 00 ACCOUNT NO. 505

ACCOUNT Maintenance Expense DATE

DESCRIPTION

20-Oct. 29

BALANCE

POST. REF.

DEBIT

G1

CREDIT

DEBIT

6 0 0 00

6 0 0 00 ACCOUNT NO. 510

ACCOUNT Rent Expense DATE

DESCRIPTION

20-Oct. 16

BALANCE

POST. REF.

DEBIT

G1

CREDIT

7 0 0 00

Figure 7–7 Postings to General Ledger Accounts for the Month of October (continued)

20-Oct. 28

DESCRIPTION

POST. REF.

G1

DEBIT

CREDIT

7 0 0 00

ACCOUNT Utilities Expense DATE

CREDIT

ACCOUNT NO. 515 BALANCE DEBIT

CREDIT

1 2 5 00

DEBIT

1 2 5 00

Section 2 The Posting Process

162-191_CH07_868829.indd 173

CREDIT

173

9/16/05 5:55:53 PM

General Ledger Account Balances How Do You Compute Account Balances? On a four-column ledger account form, each time you post to an account, you also compute and show the new account balance.

Computing a New Account Balance A rule of thumb for finding a new balance is that debits are added to debits, credits are added to credits, but debits and credits are subtracted. After you post to an account, compute the new account balance as follows: When the existing account balance is a debit, and • •

the amount posted is a debit, ADD the amounts. the amount posted is a credit, SUBTRACT the amounts. When the existing account balance is a credit, and

• •

the amount posted is a debit, SUBTRACT the amounts. the amount posted is a credit, ADD the amounts.

A ledger account usually has space for several postings. Often, blank lines remain after the month’s journal entries are posted. To save space the journal entries for more than one month are entered on the same ledger page. The new month and day are entered in the Date column, as in Figure 7–8. ACCOUNT Cash in Bank DATE

20-Oct.

ACCOUNT NO. 101 DESCRIPTION

1 31 1

Nov.

Figure 7–8 A Ledger Account with Several Postings

POST. REF.

G1 G2 G2

BALANCE DEBIT

CREDIT

25 0 0 0 00 5 0 0 00 1 2 5 00

DEBIT

CREDIT

25 0 0 0 00 24 5 0 0 00 24 3 7 5 00

Showing a Zero Balance in a Ledger Account To show a zero balance after you post a transaction, draw a line across the center of the column—where the normal balance would appear. On October 11 Roadrunner sold a phone for $200 on account to Green Company and received full payment on October 14. When the October 14 journal entry is posted, Accounts Receivable—Green Company has a zero balance. The line across the Debit Balance column in Figure 7–9 means that the account has a zero balance. The line is drawn in the Debit column because the normal balance for this account is a debit.

ACCOUNT Accounts Receivable—Green Company DATE

20-Oct.

DESCRIPTION

11 14

ACCOUNT NO. 110 POST. REF.

G1 G1

BALANCE DEBIT

CREDIT

2 0 0 00

DEBIT

CREDIT

2 0 0 00 2 0 0 00

Figure 7–9 Showing a Ledger Account with a Zero Balance 174

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 174

9/16/05 5:55:55 PM

Assessment

SECTION 2 AFTER YOU

READ

Reinforce the Main Idea Create a diagram like this one to show how information is transferred between the journal and the ledger. For each line, draw an arrowhead to show the direction of the information transfer. The first line is provided as an example.

4RANSACTION$ATE 3PECIFIC*OURNALAND0AGE.UMBER *OURNAL

,EDGER

$EBITOR#REDIT!MOUNT !CCOUNT.UMBER

Do the Math As an employee of Always Fresh Bakery, you have been asked to analyze the impact that different sales levels have on the ultimate profit or loss of the business. After posting is completed, you prepare the following line graph to illustrate the sales figures for Always Fresh Bakery. Review the line graph and write a one-paragraph analysis of the impact of sales on the bakery’s profit.

ANNUAL SALES AND REVENUE $3,000

Sales

Sales 2,000

Profit

1,000 0 January

March

May

July

September November

Months

Problem 7–2 Posting from the General Journal to the Ledger Instructions David Serlo made the following cash investment in his business. Use the sixstep process to post the entry to the ledger accounts in your working papers. GENERAL JOURNAL DATE 1 2 3 4

20-May

DESCRIPTION

POST. REF.

PAGE DEBIT

1

CREDIT 1

1 Cash in Bank David Serlo, Capital Memorandum 101

10 0 0 0 00

2

10 0 0 0 00

3 4

Section 2 The Posting Process

162-191_CH07_868829.indd 175

175

9/16/05 5:55:59 PM

Accounting Careers in Focus COUNTY AUDITOR

Internal Audit Department, Maricopa County, Arizona Ross Tate Q: What does the internal audit department do? A: We audit and report on the county’s operational and financial activities.

Q: What are your day-to-day responsibilities? A: I serve as the county government’s “eyes and ears” by forming teams to audit all county departments, and investigate financial inconsistencies and possible theft. I meet with managers of different audit teams, assign tasks, and make sure the work gets done.

.. Tips from . ntinuous Learning is a co u after yo process—even from school. have graduated the job s on Build your skill g for projects by volunteerin ea immediate ar beyond your al ty. You can so of responsibili d join industry take courses an ain at the rem associations to . ld fie top of your

Q: What are some of the factors that have been key to your success? A: Continuing education has been key. Through continuing education, you stay

on top of developments in your field. It is also recommended to maintain a CPA license and other certifications that can advance your career. Professional journals and industry associations are also great sources of information.

Q: What do you like most about your job? A: It’s rewarding because the government serves the people of the county in many important ways. I can help make a big difference by working in public service. The variety of tasks also makes my job interesting.

Q: What advice do you have for accounting students just beginning their careers? A: Put in the extra time and effort whether it’s asked for or not. This will help you to get ahead quickly and greatly improve the quality of your work.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Supervise internal audits and communicate the results to management; always stay aware of new laws and rules. Training or Education Needed: A bachelor’s degree in accounting or finance; a CPA or certified internal auditor (CIA) title. Aptitudes, Abilities, and Skills: Advanced knowledge of generally accepted accounting principles; critical thinking, communication, and technology skills. Salary Range: $35,000 to $120,000 depending on experience, level of responsibility, industry, and location. Career Path: Start by working as an entry-level internal auditor, and then gradually assume more responsibility as you gain knowledge and experience.

Thinking Critically 176

In what ways could you demonstrate to an employer that you are a valuable employee?

Chapter 7 Accounting Careers in Focus

162-191_CH07_868829.indd 176

4/6/06 5:41:11 PM

SECTION 3

Preparing a Trial Balance

In the last section, you learned how to post to the ledger. In this section you will learn how to prepare a trial balance. Accountants use a trial balance to prove that the accounting system is in balance. Preparing a trial balance is the fifth step in the accounting cycle. Every time the accountant for the Jeep dealer in your area posts to the ledger, he or she prepares a trial balance. The trial balance provides assurance that the journal entries are posted properly.

BEFORE YOU

READ

Main Idea

The trial balance is a proof that total debits equal total credits in the ledger.

Read to Learn…

The Fifth Step in the Accounting Cycle: The Trial Balance

➤ how to prepare a trial

What Is the Purpose of a Trial Balance? After the journal entries have been posted to the accounts in the general ledger, the total of all of the debit balances should equal the total of all of the credit balances. Adding all the debit balances, then adding all the credit balances, and finally comparing the two totals to see whether they are equal is called proving the ledger . A formal way to prove the ledger is to prepare a trial balance . A trial balance is a list of all the account names and their current balances. All of the debit balances are added. All of the credit balances are added. The totals are compared. If the totals are the same, the trial balance is in balance. If the totals are not equal, an error was made in journalizing, posting, or preparing the trial balance. You must find the error and correct it before continuing with the next step in the accounting cycle. The equality of debits and credits does not, however, guarantee that the accounting records do not have errors. An amount might be posted to the wrong account. For example, suppose a credit sale for $500 was posted to the Cash in Bank account instead of Accounts Receivable. The trial balance remains in balance, but the company’s cash is overstated by $500. What if a transaction did not get posted? Two accounts have wrong balances, but the total debits still equal the total credits. The trial balance for Roadrunner Delivery Service for the month of October is shown in Figure 7–10 on page 178. The trial balance was prepared on two-column accounting stationery. The account numbers are listed in the far left column. The account names are listed in the next column. All of the debit balances are entered in the first amount column, and all of the credit balances are entered in the second amount column. Trial balances do not have to be prepared on accounting stationery, however. They can be handwritten on plain paper, typed, or prepared on a computer.

balance. (p. 177) ➤ how to find and correct errors in the trial balance. (p. 178)

Key Terms

proving the ledger trial balance transposition error slide error correcting entry

Section 3 Preparing a Trial Balance

162-191_CH07_868829.indd 177

177

4/6/06 5:41:14 PM

Roadrunner Delivery Service Trial Balance October 31, 20-101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

Cash in Bank Accounts Receivable—City News Accounts Receivable—Green Company Computer Equipment Office Equipment Delivery Equipment Accounts Payable—Beacon Advertising Accounts Payable—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense Totals

Figure 7–10 Trial Balance

21 1 2 5 00 1 4 5 0 00 3 0 0 0 00 2 0 0 00 12 0 0 0 00 7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00 2 6 5 0 00 75 600 700 125 39 7 7 5

00 00 00 00 00

39 7 7 5 00

Finding and Correcting Errors What Do You Do if You Are Out of Balance? Anyone who works in accounting understands the saying, “To err is human . . .” If the debits do not equal the credits, you need to find the errors and correct them.

Finding Errors Most trial balance errors can be located easily and quickly. When total debits do not equal total credits, follow these steps:

AS YOU

READ

It’s Not What It Seems Slide When you think of the word slide, you might think of playground equipment. In accounting a slide error is a number with the decimal point in the wrong place.

178

1. Add the debit and credit columns again. You may have added one or both of the columns incorrectly. 2. Find the difference between the debit and credit columns. If this amount is 10, 100, 1,000, and so on, you probably made an addition error. Suppose, for example, you have total debits of $35,245 and total credits of $35,345. The difference is $100, which indicates an addition error is likely. Add the columns again to find the error. 3. Check if the amount you are out of balance is evenly divisible by 9. For example, suppose the difference between the debits and credits is $27. That amount is evenly divisible by 9 (27
9  3). If the difference is evenly divisible by 9, you may have a transposition error or a slide error. A transposition error occurs when two digits within an amount are accidentally reversed, or transposed. For example, the amount $325 may have been written as $352. A slide error occurs when a decimal point is moved by mistake. If you write $1,800 as either $180 or $18,000, you made a slide error. To find a transposition error or a slide error, check the trial balance amounts against the general ledger account balances to make sure you copied the balances correctly.

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 178

9/16/05 5:56:12 PM

4. Make sure that you included all general ledger accounts in the trial balance. Look in the general ledger for an account balance equal to the amount you are out of balance. For example, if the difference between total debits and credits is $725, look in the general ledger for an account with a balance of $725. 5. One of the account balances could have been recorded in the wrong column. That is, a debit was entered in the credit column or a credit was entered in the debit column. To find out if this happened, divide the out-of-balance amount by 2 and check whether the result matches the balance of an account. For example, suppose that the difference between the two columns is $300; $300 divided by 2 is $150. Look in the debit and credit columns for an account balance of $150. Then check to see if the $150 is entered in the wrong column. 6. If you still have not found the error, recompute the balance in each ledger account. You may have an addition or subtraction error on a ledger account form. 7. Finally, check the general ledger accounts to verify that the correct amounts are posted from the journal entries. Also, check to make sure that debit amounts are posted to the debit column and credit amounts are posted to the credit column.

Correcting Entries When mistakes are made in accounting, one rule applies: Never erase an error. The method for correcting an error depends on when and where the error is found. There are three types of errors: • • •

Error in a journal entry that has not been posted. Error in posting to the ledger when the journal entry is correct. Error in a journal entry that has been posted.

In Chapter 6 you learned how to handle the first situation. When an error in a journal entry is discovered before posting, you draw a single line through the incorrect item in the journal and write the correction directly above it. If the journal entry is correct but is posted incorrectly to the ledger, you draw a single line through the incorrect item in the ledger and write the correction directly above it. When an error in a journal entry is discovered after posting, make a correcting entry to fix the error. On November 15 the accountant for Roadrunner found an error in a journal entry made on November 2. A $100 check to pay the electricity bill was journalized and posted to the Maintenance Expense account by mistake. The original journal entry is shown in the following T accounts. Cash in Bank

Maintenance Expense Debit  100

Credit 

Debit 

Credit  100

Section 3 Preparing a Trial Balance

162-191_CH07_868829.indd 179

179

4/6/06 5:41:17 PM

The following T accounts show how the transaction should have been recorded. Cash in Bank

Utilities Expense Debit  100

Credit 

Debit 

Credit  100

As you can see, the $100 credit to Cash in Bank is correct. The error is in the debit part of the November 2 transaction. Maintenance Expense is incorrectly debited for $100. To correct the error, Maintenance Expense is credited for $100 and Utilities Expense is debited for $100. The accountant wrote Memorandum 70 to notify the accounting clerk of the mistake. The correcting entry, recorded in the general journal, is shown in Figure 7–11. GENERAL JOURNAL DATE 1 2

20-Nov.

PAGE POST. REF.

DESCRIPTION

DEBIT

3

CREDIT 1

15 Utilities Expense Maintenance Expense Memorandum 70

3 4

1 0 0 00

2

1 0 0 00

3 4

5

5

Figure 7–11 Correcting Entry

Posting a correcting entry is similar to any other posting. In the Description column of the ledger accounts, however, the words Correcting Entry are written. Figure 7–12 shows how the correcting entry is posted to the Maintenance Expense and Utilities Expense accounts.

ACCOUNT Maintenance Expense DATE

20-Oct. Nov.

DESCRIPTION

29 2 15 Correcting Entry

ACCOUNT NO. 505 POST. REF.

G1 G2 G3

BALANCE DEBIT

CREDIT

1 0 0 00 1 0 0 00

ACCOUNT Utilities Expense DATE

20-Oct. Nov.

DEBIT

CREDIT

6 0 0 00 7 0 0 00 6 0 0 00

ACCOUNT NO. 515 DESCRIPTION

28 15 Correcting Entry

POST. REF.

G1 G3

BALANCE DEBIT

1 2 5 00 1 0 0 00

CREDIT

DEBIT

CREDIT

1 2 5 00 2 2 5 00

Figure 7–12 Posting of Correcting Entry

180

Chapter 7 Posting Journal Entries to General Ledger Accounts

162-191_CH07_868829.indd 180

9/16/05 5:56:25 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to show how to correct errors in three situations.

7HERE%RROR7AS&OUND 7HEN%RROR7AS&OUND *OURNAL

"EFORE0OSTING

,EDGER

!FTER0OSTING

*OURNAL

!FTER0OSTING

(OWTO#ORRECTTHE%RROR

Do the Math 1. Compare the numbers in Column 1 to those in Column 2. Find any transposition, slide, or omission errors. Identify the type of error for each line. 2. Using a calculator or adding Column 1 Column 2 machine, total Column 1. $18.00 $180.00 Correct any errors in Column 2, and then total Column 2. $15,000 $1,500 Do the totals of Columns 1 $222.52 $222.25 and 2 match? $187,235,499.05 $187,235,499.50 $47,988

$47,988

$578,334.99

$5,778,334.99

Problem 7–3 Analyzing a Source Document Instructions Analyze the transaction that is described in Memorandum 47, and then record and post the required correcting entry in your working papers.

EE IM FUUNNTTIM

MEMORANDUM 47

A M U S E M E NT A RC A D E

TO: FROM: DATE: SUBJECT:

Accounting Clerk Dan Vonderhaar May 20, 20-Correction of error

On May 10, we purchased an office copier for $1,500. I noticed in the general journal that the entry was recorded and posted to the Computer Equipment account. Please record the necessary entry to correct this error.

Problem 7–4 Recording and Posting a Correcting Entry Instructions On July 7 Video Connection’s accounting supervisor discovered that a July 3 transaction had been recorded incorrectly. The transaction, involving the purchase of advertising in the local newspaper with a $300 check, was incorrectly journalized and posted to the Rent Expense account. In your working papers, record and post the correcting entry using Memorandum 13 as the source document.

VIDEO Connection TO: FROM: DATE: SUBJECT:

MEMORANDUM 13

Accounting Clerk Accounting Manager July 7, 20-Correction of error

On July 3, we paid $300 for advertising in the Daily News Record that was incorrectly journalized and posted to the Rent Expense account. Please record the necessary entry to correct this error.

Section 3 Preparing a Trial Balance

162-191_CH07_868829.indd 181

181

9/16/05 5:56:30 PM

Summary

CH A P T ER 7 Key Concepts

1. Posting, which is the fourth step in the accounting cycle, is the process of transferring information from a journal to specific ledger accounts. The general ledger is a permanent record organized by account number. In a manual accounting system, information about specific accounts is recorded in ledger account forms. In a computerized accounting system, information about accounts is kept in a group of electronic files. The purpose of posting is to show the impact of business transactions on the individual accounts. The steps for posting from the general journal to the general ledger are described in the following illustration. 2. Post general journal entries by following these steps:

GENERAL JOURNAL DATE 1 2

20-Oct.

3 4

DESCRIPTION

POST. REF.

PAGE DEBIT

1

CREDIT 1

1 Cash in Bank Maria Sanchez, Capital Memorandum 1

101 301

25 0 0 0 00

2

25 0 0 0 00

6 Enter the account

3

number in the general journal Post. Ref. column

4

5

5

1 Enter date of the journal entry

3 Enter journal letter

2 Description column is usually blank

and page number in Post. Ref. column

5 Compute the new account balance

4 Enter the debit amount

ACCOUNT Cash in Bank DATE

20-Oct.

DESCRIPTION

1

ACCOUNT NO. 101 POST. REF.

G1

BALANCE DEBIT

CREDIT

25 0 0 0 00

DEBIT

CREDIT

25 0 0 0 00

7 Repeat steps 1–6 for the

credit part of journal entry

ACCOUNT Maria Sanchez, Capital DATE

20-Oct.

182

DESCRIPTION

1

ACCOUNT NO. 301 POST. REF.

G1

BALANCE DEBIT

CREDIT

25 0 0 0 00

DEBIT

CREDIT

25 0 0 0 00

Chapter 7 Summary

162-191_CH07_868829.indd 182

9/16/05 5:56:33 PM

Summary

CHAPT E R 7

3. After posting has been completed, a trial balance is prepared to prove the ledger. This is the fifth step in the accounting cycle. Proving the ledger is making sure that total debits equal total credits. 4. If total debits and total credits are not equal, you must locate and correct the errors. The following trial balance errors are the most common: • • • • •

addition and subtraction errors transpositions slides omissions incorrect debiting or crediting

5. The method for correcting an error depends on when and where the error is found: • If the journal entry is wrong and has not yet been posted, draw a line through the incorrect item and write the correct information directly above it. • If the journal entry is correct but the error occurred in posting, draw a line through the incorrect item in the ledger and write the correct information directly above it. • If the journal entry is wrong and has already been posted, make a correcting entry. The correcting entry is posted to the general ledger. It is similar to any other posting except that it includes the words Correcting Entry in the Description column.

Key Terms correcting entry

(p. 179)

general ledger

(p. 164)

ledger account forms (p. 165) posting

(p. 164)

proving the ledger

(p. 177)

slide error

(p. 178)

transposition error

(p. 178)

trial balance

(p. 177)

Chapter 7 Summary

162-191_CH07_868829.indd 183

183

4/6/06 5:41:26 PM

C H A P T ER 7 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

Steps in the Posting Process a. What six steps are required to open a general ledger account? b. List the steps in the posting process. Posting General Journal Entries a. What information is entered in the Posting Reference (Post. Ref.) column of the ledger account? Give an example. b. What information is entered in the Posting Reference (Post. Ref.) column of the general journal entry? Give an example. Trial Balance a. What information does a trial balance contain? b. What is the purpose of a trial balance? Trial Balance Errors a. What steps do you perform to locate trial balance errors? b. Distinguish between a slide error and a transposition error and give an example of each. Correcting Entries a. What is the basic rule concerning mistakes in accounting? b. How do you correct an error in a journal entry that has already been posted?

Apply Key Terms As a junior accounting clerk for Action Sports Outfitters, you are being evaluated for a raise. Your boss wants to see how well you understand basic accounting terminology. He asks you to write a sentence for each of the following terms, showing how you would use each term in connection with Action Sports Outfitters. correcting entry general ledger ledger account forms posting

184

proving the ledger slide error transposition error trial balance

Chapter 7 Review and Activities

162-191_CH07_868829.indd 184

9/16/05 5:56:37 PM

Computerized Accounting

CHAPT E R 7

Posting to the General Ledger Making the Transition from a Manual to a Computerized System Task Posting to the General Ledger

Manual Methods • Transfer the details of each journal entry to individual ledger accounts. • Calculate the new account balance for each ledger account.

Computerized Methods • After each journal entry is entered, amounts are posted automatically into the general ledger. • New account balances are calculated for you.

Q&A Peachtree Question

Answer

How do I post general journal transactions?

• After entering a journal entry, click Save.

What if I find an error in my journal entry after it has been posted?

Changes to journal entries can be made before or after the entry has been posted. 1. From the General Journal Entry window, drop down the Edit menu. Select Edit Record. 2. Select the entry you want to change. 3. Make the correction. 4. Click Save, and then click Close.

QuickBooks Q & A QuickBooks Question

Answer

How do I post general journal transactions?

• After entering a journal entry, click Save & Close.

What if I find an error in my journal entry after it has been posted?

Changes to journal entries can be made before or after the entry has been posted. 1. In the Make General Journal Entries window, click the Previous or Next buttons until you locate the entry to be changed. 2. Make the correction. 3. Click Save & Close.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 7 Computerized Accounting

162-191_CH07_868829.indd 185

185

9/16/05 5:56:48 PM

Problems

C H A P T ER 7 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 7–5 1. Select the problem set for Wilderness Rentals (Prob. 7–5). 2. Rename the company and set the system date. 3. Print a General Ledger report. 4. Complete the Analyze activity. 5. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 7–5 1. Restore the Problem 7-5.QBB file. 2. Print a General Ledger report. 3. Complete the Analyze activity. 4. Back up your work.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 7–5 Posting General Journal Transactions The accounts used by Wilderness Rentals have been opened and are included in the working papers accompanying this textbook. The general journal transactions for March of the current year are also included.

Instructions Post the transactions recorded on page 1 of the general journal to the accounts in the general ledger.

Analyze

Identify the account with the highest debit balance.

Problem 7–6 Preparing a Trial Balance The ledger accounts for Hot Suds Car Wash are shown in your working papers.

Instructions Prepare a trial balance as of March 31 of the current year.

Analyze

Identify the account with the highest credit balance.

Problem 7–7 Journalizing and Posting Business Transactions A partial chart of accounts for Kits & Pups Grooming follows.

SMART GUIDE Step–by–Step Instructions: Problem 7–6 1. Select the problem set for Hot Suds Car Wash (Prob. 7–6). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance report. 4. Complete the Analyze activity. 5. End the session.

General Ledger 101 Cash in Bank 301 105 Accts. Rec.—J. Alvarez 305 120 Grooming Supplies 401 130 Office Furniture 405 140 Grooming Equipment 525 205 Accts. Pay.—Dogs & Cats Inc.

Instructions 1. In your working papers, open an account in the general ledger for each of these accounts. 2. Record the March transactions on page 1 of the general journal. 3. Post each journal entry to the appropriate ledger account. 4. Prove the ledger by preparing a trial balance. Date

Mar

186

Abe Shultz, Capital Abe Shultz, Withdrawals Boarding Revenue Grooming Revenue Salaries Expense

Transactions

1 Abe Shultz invested $5,000 in the business, Memorandum 51. 3 Abe Shultz transferred a desk and chairs valued at $1,200 to the business, Memorandum 52. CONTINUE

Chapter 7 Problems

162-191_CH07_868829.indd 186

9/16/05 5:56:50 PM

Problems Date

Mar.

Transactions

5 Issued Check 551 for $300 for grooming supplies. 7 Bought grooming equipment on account for $1,800 from Dogs & Cats Inc., Invoice DC201. 9 Groomed Juan Alvarez’s show dogs on account, $400, Sales Invoice 350. 12 Paid Dogs & Cats Inc. $900 on account, Check 552. 15 Issued Check 553 for $500 to pay the office secretary’s salary. 18 Abe Shultz withdrew $1,000 cash from the business, Check 554. 20 Deposited $1,400 received from clients for boarding their pets, Receipts 477–480. 24 Wrote Check 555 for $900 to Dogs & Cats Inc. to apply on account. 26 Received a check for $400 from Juan Alvarez on account, Receipt 481.

Analyze

Identify the temporary accounts.

Problem 7–8 Journalizing and Posting Business Transactions The chart of accounts for Outback Guide Service follows. General Ledger 101 Cash in Bank 301 Juanita Ortega, Capital 115 Accts. Rec.—Podaski 302 Juanita Ortega, Withdrawals Systems Inc. 401 Guide Service Revenue 140 Computer Equipment 501 Advertising Expense 145 Hiking Equipment 150 Rafting Equipment 205 Accts. Pay.—Peak Equipment Inc. 207 Accts. Pay.—Premier Processors

Instructions 1. In your working papers, open an account in the general ledger for each account in the chart of accounts. 2. Record the following transactions on page 1 of the general journal. 3. Post each journal entry to the appropriate accounts in the ledger. 4. Prove the ledger by preparing a trial balance. Date

Mar.

Transactions

1 Invested $20,000 in cash and transferred rafting equipment valued at $5,000 to the business, Memorandum 35. 3 Purchased $600 in hiking equipment on account from Peak Equipment Inc., Invoice 101.

CHAPT E R 7 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 7–6 1. Restore the Problem 7-6.QBB file. 2. Print a Trial Balance report. 3. Complete the Analyze activity. 4. Back up your work.

SMART GUIDE Step–by–Step Instructions: Problem 7–7 1. Select the problem set for Kits & Pups Grooming (Prob. 7–7). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions. 4. Print a General Journal report. 5. Proof your work. 6. Print a General Ledger report and a General Ledger Trial Balance report. 7. Complete the Analyze activity. 8. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 7–7 1. Restore the Problem 7-7.QBB file. 2. Enter all of the general journal transactions. 3. Print a Journal report. 4. Proof your work. 5. Print a General Ledger report and a Trial Balance report. 6. Complete the Analyze activity. 7. Back up your work.

CONTINUE

Chapter 7 Problems

162-191_CH07_868829.indd 187

187

9/16/05 5:56:52 PM

Problems

C H A P T ER 7 Date

SOURCE DOCUMENT PROBLEM

Mar.

Transactions

5

Bought a $2,800 computer from Premier Processors and agreed to pay for it within 60 days, Invoice 616. Deposited $700 cash received from clients, Receipts 310–315. Paid $400 to the Daily Courier for an ad, Check 652. Sent a bill for $900 to Podaski Systems Inc. for conducting a group rafting trip for them, Sales Invoice 352. Juanita Ortega wrote a check for $800 for personal use, Check 653. Paid Premier Processors $1,400 to apply on account, Check 654. Received $900 from Podaski Systems Inc. in full payment for the amount owed, Receipt 316. Bought a $500 television ad with LIVE TV, Check 655. Paid Peak Equipment Inc. $600 by writing Check 656.

7 9 12

Problem 7–8 Use the source documents in your working papers to complete this problem.

15 18

SMART GUIDE

22

Step–by–Step Instructions: Problem 7–8 1. Select the problem set for Outback Guide Service (Prob. 7–8). 2. Rename the company and set the system date. 3. Enter all of the general journal transactions. 4. Print a General Journal report. 5. Proof your work. 6. Print a General Ledger report and a General Ledger Trial Balance report. 7. Complete the Analyze activity. 8. End the session.

27 28

Analyze

Calculate the total change in accounts payable.

CHALLENGE PROBLEM

Problem 7–9 Recording and Posting Correcting Entries

An auditor reviewed the accounting records of Showbiz Video. The auditor wrote a list of transactions, outlined below, describing the errors discovered in the March records. The general journal for March and a portion of the general ledger are included in your working papers.

Instructions SMART GUIDE Step–by–Step Instructions: Problem 7–9 1. Select the problem set for Showbiz Video (Prob. 7–9). 2. Rename the company and set the system date. 3. Correct the general journal entries based on the auditor’s report. 4. Print a General Journal report and a General Ledger report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

1. Record correcting entries on general journal page 22. Use March 31 as the date and Memorandum 50 as the source document for all correcting entries. 2. Some errors will not require correcting entries but will require a general ledger correction. Make the appropriate general ledger corrections. 3. Post all correcting entries to the general ledger accounts. Date

Mar.

Transactions

3 7 13 17 19 27 29

Analyze

188

The $125 purchase was for office supplies. A $200 payment to a creditor, Broad Street Office Supply, was not posted to the account. Greg Failla withdrew $1,200 from the business for personal use. Cash totaling $2,000 was received for video rentals. A $75 receipt from Shannon Flannery was posted as $57. Greg Failla invested an additional $3,000 in the business. The revenue of $1,000 was for video rentals. Compute the amount that Greg Failla, Capital was overstated or understated before the correcting entries were posted.

Chapter 7 Problems

162-191_CH07_868829.indd 188

9/21/05 1:24:34 PM

Winning Competitive Events

CHAPTER 7

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. An account balance is a. the total of the credit side of the account. b. the total of the debit side of the account. c. the difference between the increases and decreases recorded in the account. d. Assets = Liabilities + Owner’s equity. e. unchanged by posting debits and credits to the account. 2. An error in posting may cause a. income to be overstated or understated on the income statement. b. a business to pay too much to a vendor. c. cash on hand to be less than the balance in the cash account. d. all of the above. 3. When preparing a trial balance, which of the following would not be considered a procedure? a. Check to see if both columns equal. b. Double rule both columns. c. Write the general ledger account names in the work sheet account name column. d. All of these are correct procedures. e. None of these answers.

Business Professionals of America MULTIPLE CHOICE 4. When posting to the general ledger accounts, the information in the Post. Ref. Column of each ledger account refers to a. the transaction’s source document. b. the account number. c. the journal and page number. d. the date. 5. The process of transferring information from the journal to the individual general ledger accounts is called Need More Help? a. journalizing Go to glencoeaccounting.glencoe.com and b. carrying forward click on Student Center. Click on Winning c. transferring Competitive Events and select Chapter 7. d. posting • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

162-191_CH07_868829.indd 189

Chapter 7 Winning Competitive Events

189

10/13/05 10:07:36 PM

C H A P T ER 7 Critical Thinking

The General Ledger and the Trial Balance

CASE

STUDY

Service Business: Accounting Services

ETHICS

Meeting a Deadline

a mattoefr

190

Real-World Applications and Connections

1. What is the purpose of each amount column in the four-column ledger account form? 2. Describe how correcting an error discovered after a transaction is posted is different from correcting an error before it is posted. 3. In your trial balance, the debits equal $18,000 and the credits equal $18,810. What are the most likely reasons for the difference? 4. Read the answer to “How do I post general journal transactions?” for Peachtree or QuickBooks on page 185. Identify the step(s) of the accounting cycle described in the answer. 5. Assume that you started a service business by depositing cash into a business checking account, purchasing various assets, and incurring a number of expenses. You have commitments from customers and you will start earning revenue next week. Develop a system for keeping accounting records. 6. What if your trial balance were out of balance by a small amount, for example by $8.39? Is it worthwhile to find the reason for differences? Why or why not? Joel Rivlin studied accounting in college and then worked as an accountant for a local real estate company. After becoming a CPA, Joel decided to start his own company, Joel Rivlin, CPA. Robert’s Excavating Services came to Joel with a problem. The company’s trial balance shows total debits of $76,240 and total credits of $75,090. The owner knows that clients paid for services worth at least $2,500 during the month, but the Service Revenue account balance is only $800. The owner also wrote a check for $550 for advertising, but the Advertising Expense account shows a zero balance. INSTRUCTIONS 1. Describe what Joel should do to find the problems. 2. Suggest probable causes for the trial balance being out of balance. Imagine that you are an accounting clerk for Ace Hardware. The store manager has asked you to prepare the trial balance. The totals on the trial balance are not equal and you cannot find the error. You realize that the trial balance is due at the end of the day. You are frustrated and consider changing one of the account balances just to get the trial balance to balance. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Chapter 7 Real-World Applications and Connections

162-191_CH07_868829.indd 190

9/16/05 5:56:57 PM

Real-World Applications and Connections ))

$ )) Communicating ACCOUNTING

Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Teaching the Posting Process You have been asked to teach new accounting clerks how to post business transactions. Create a written step-by-step guide to give to clerks on their first day on the job. Create an imaginary business transaction to illustrate the process.

Interpreting and Communicating Information Every worker must learn how to interpret information and communicate effectively with co-workers, customers, and superiors. ON THE JOB As an accounting clerk for New Wave Inc., a surfboard manufacturer, one of your duties is to audit the accounting records and make the necessary corrections. Former employees did not always maintain the records accurately. The owner, Ron Lee, has asked you to provide written explanations for each error discovered in your audit. INSTRUCTIONS 1. During an audit you discover a transposition error. An invoice for $510.00 payable to Marketing Pros was recorded and posted as $150.00. How do you correct this error? 2. Using word processing software, write a memo to Mr. Lee explaining how you corrected the error.

English: The Link Language If business people from Sweden and Japan were conducting business, they would probably communicate in English—a language that both are likely to speak and understand. In international business, English is known as the link language. Although English is the third-most spoken native language in the world, it is the most widely learned second language. Approximately 375 million people speak English as a second language. The next time you turn on your computer, consider that more than 80 percent of the information stored in the world’s computers is in English. INSTRUCTIONS Justify why you think English is or is not a good choice for an international business “link” language.

Your Personal Balances Knowing how to find accounting errors can help you in your personal life. Personal records that should be checked for accuracy include statements for bank accounts and credit cards; catalog invoices; and bills for medical services, insurance, and utilities. Verify all invoices before paying them. PERSONAL FINANCE ACTIVITY Assume that you just received a statement from your credit card company. How would you go about checking its accuracy? List the items you would verify. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 7.

glencoeaccounting.glencoe.com

162-191_CH07_868829.indd 191

CHAPT E R 7

Chapter 7 Real-World Applications and Connections

191

9/16/05 5:57:00 PM

CHAPTER 8

The Six-Column Work Sheet BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the purpose of the work sheet.

2.

Describe the parts of a six-column work sheet.

1. 2. 3. 4.

3.

Prepare a six-column work sheet.

4.

Calculate net income and net loss.

5.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

The work sheet is the tool used to complete the final steps of the accounting cycle.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business SUMMARIZING RESULTS

American Express Company “Don’t leave home without it.” For decades, people and businesses worldwide have followed the ad slogan’s advice and used their American Express card for purchases. The American Express Company, originally founded as a delivery service in 1850, is also the world’s top travel agency. American Express would not want to leave home without its chief executive officer, Kenneth Chenault. Described as a tough-minded yet warm person, this CEO gets results. His leadership during difficult times enabled the company to not only survive, but thrive. The company’s expenses include advertising, promotions, and salaries. Commissions from retailers provide large revenues. Accountants at American Express use tools like work sheets to summarize revenues and expenses.

What Do You Think? Why do you think summarizing expenses and revenues might help manage a business like American Express?

194

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 194

10/17/05 6:32:10 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE When you prepare to write a research paper, you probably use note cards, word processing software, or a database program to collect and organize information. You may also write a rough draft of your paper, further organizing the information. In accounting a work sheet is a tool used to collect and to organize financial information. You will learn how to create a work sheet in this chapter.

glencoeaccounting.glencoe.com

194-217_CH08_868829.indd 195

Personal Connection 1. How might your ability to organize information be valuable to your employer? 2. Why is it important for financial and other information to be organized in a certain way?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 8 to learn more about the real-world workplace.

195

9/15/05 1:20:08 PM

SECTION 1

BEFORE YOU

Preparing the Work Sheet As you learned in Chapter 6, the length of an accounting period can vary. The maximum period covered by the accounting cycle is one year. The first five steps of the accounting cycle are performed frequently during the cycle. The last four steps—preparing a work sheet, preparing financial statements, journalizing and posting closing entries, and preparing a post-closing trial balance—are performed at the end of the accounting period. Look at Figure 8–1. In this chapter you will learn how to prepare a work sheet, the sixth step of the accounting cycle. With this step, businesses like your local Midas Muffler shop or a Nike Outlet collect information from their ledger accounts and record this information on a single form.

READ

Main Idea

The work sheet organizes general ledger account information for the financial statements.

Read to Learn…

➤ the purpose of a work sheet. (p. 197) ➤ the sections of a work sheet. (p. 197)

Key Terms work sheet ruling

Analyze each transaction

Collect and verify source documents

ACCOUNT DEBIT

ACCOUNT DEBIT

2

MEMORANDUM

1 9 GENERAL JOURNAL

Prepare a post-closing trial balance

GENERAL JOURNAL

CREDIT

INVOICE RECEIPT

POST-CLOSING TRIAL BALANCE

Journalize each transaction

8

LEDGER

Journalize and post closing entries

3

CREDIT

Post to the ledger LEDGER

4

6

7

5 TRIAL BALANCE

WORK SHEET

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER'S EQUITY

BALANCE SHEET

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

Figure 8–1 Steps in the Accounting Cycle with Step 6 Highlighted

196

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 196

9/15/05 1:20:36 PM

The Sixth Step of the Accounting Cycle: The Work Sheet What Is the Purpose of a Work Sheet? A work sheet is just what its name implies—a working paper used to collect information from the ledger accounts in one place. Like the T account, the work sheet is a tool that the accountant uses. With the work sheet, an accountant gathers all of the information needed to prepare the financial statements and to complete the other end-of-period activities. A work sheet may be prepared in pencil on standard multicolumn accounting paper. The paper comes in several sizes and is usually printed without column headings. Blank spaces for column headings allow the accountant to enter the headings needed by a particular business. The work sheet can also be prepared using computer spreadsheet software.

The Work Sheet Sections How Is the Work Sheet Organized? The Roadrunner Delivery Service work sheet, shown in Figure 8–2, has five sections: 1. the heading 2. the Account Name section 3. the Trial Balance section 4. the Income Statement section 5. the Balance Sheet section

1

ACCT. NO.

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCOUNT NAME

CREDIT

DEBIT

Who? What? When?

INCOME STATEMENT CREDIT

DEBIT

BALANCE SHEET CREDIT

DEBIT

1

1

2

2

3

3

2

3

4

The Account Name section includes a column for the account number and a column for the account name. The Trial Balance, Income Statement, and Balance Sheet sections have Debit and Credit amount columns. The six amount columns give this work sheet its name: the six-column work sheet.

5 Figure 8–2 Six-Column Work Sheet

The Work Sheet Heading The work sheet heading contains three kinds of information: 1. The name of the business (Who?) 2. The name of the accounting form (What?) 3. The period covered by the work sheet (When?) Notice how these elements are positioned on the work sheet in Figure 8–2. Follow this format when preparing the heading of any work sheet. Section 1 Preparing the Work Sheet

194-217_CH08_868829.indd 197

197

4/6/06 5:42:30 PM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

ACCOUNT NAME

DEBIT

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

CREDIT

INCOME STATEMENT DEBIT

21 1 2 5 00 1 4 5 0 00

CREDIT

BALANCE SHEET DEBIT

CREDIT 1 2 3

3 0 0 0 00 2 0 0 00 12 0 0 0 00

4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

7 8 9 10 11

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00

17

12 13 14 15 16 17

Figure 8–3 Work Sheet with Account Names and Trial Balance Amounts

The Account Name Section Information for the Account Name and Trial Balance sections comes from the general ledger accounts. In Chapter 7 you prepared a trial balance by listing the account names and their final balances. A trial balance can be prepared at any time during the accounting period to prove the general ledger. When a trial balance is prepared at the end of an accounting period, though, it is prepared as a part of the work sheet. Look at the work sheet in Figure 8–3. The account numbers and names are from Roadrunner’s general ledger and are listed on the work sheet in the same order that they appear in the general ledger: • • • • •

AS YOU

READ

Key Point The Work Sheet On the work sheet, enter the number, name, and balance of every general ledger account.

198

Assets Liabilities Owner’s Equity Revenue Expenses

All of the general ledger accounts are listed on the work sheet, even those that have a zero balance. Listing all of the accounts avoids accidentally omitting an account and ensures that the work sheet contains all accounts needed to prepare the financial reports.

The Trial Balance Section The end-of-period balance in the general ledger for each account is entered in the appropriate amount column of the Trial Balance section. Accounts with debit balances are entered in the Trial Balance Debit column. Accounts with credit balances are entered in the Trial Balance Credit column.

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 198

9/15/05 1:20:42 PM

If an account has a zero balance at the end of the period, a line is drawn in the normal balance column. Notice in Figure 8–3 that a line was drawn in the Trial Balance Debit column for Accounts Receivable—Green Company. Lines were also recorded in the Trial Balance Debit and Credit columns for Income Summary since this account does not have a normal balance side. You will learn more about the Income Summary account in Chapter 10. Ruling the Trial Balance Section. Ruling means “drawing a line.” In accounting a single rule, or line, drawn under a column of amounts means that the entries above the rule are ready to be totaled. After all account names and balances have been entered on the work sheet, a single rule is drawn under the last entry and across both amount columns of the Trial Balance section as shown in Figure 8–4. The Debit and Credit columns are now ready for totaling. Totaling the Trial Balance Section. If the ledger balances, the total debits will equal the total credits. Look at Figure 8–4. The totals match, with each column totaling $39,775. Since total debits equal total credits, a double rule is drawn across both amount columns just beneath the totals. This double rule means that the amounts just above it are totals and that no other entries will be made in the Trial Balance columns. If the total debits do not equal the total credits, there is an error. Find and correct the error before completing the work sheet. Procedures for locating errors are discussed in Chapter 7.

AS YOU

READ

It’s Not What It Seems Rule We usually think of a rule as a law or regulation. When we prepare accounting reports, a rule is a straight line that we draw on the paper.

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

17

TRIAL BALANCE ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

CREDIT

DEBIT

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

CREDIT

21 1 2 5 00 1 4 5 0 00

1 2 3

3 0 0 0 00 2 0 0 00 12 0 0 0 00

4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 8 9

5 0 0 00

10 11

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

12 13 14 15 16

39 7 7 5 00

17

18

18

Figure 8–4 Work Sheet with Trial Balance Section Completed

Section 1 Preparing the Work Sheet

194-217_CH08_868829.indd 199

199

9/15/05 1:20:44 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Create a diagram similar to this one. List the information that is transferred from the general ledger to the worksheet. Add answer lines as needed.

)NFORMATION4RANSFERRED 'ENERAL ,EDGER

7ORK 3HEET

Do the Math The columns in the Trial Balance section of the work sheet have different totals: Debit total
$34,800

Credit total
$35,600

The accountant discovered that the balance for Advertising Expense had been entered in the Credit column instead of the Debit column. Calculate the balance for the Advertising Expense account that should have been entered in the Debit column. What is the new total of the Debit column and Credit column?

Problem 8–1 Entering Account Balances on the Work Sheet The following accounts appear on the work sheet for Lee’s Bike Shop. Store Equipment Rent Expense Service Fees Revenue Accts. Pay.—Rubino Supply

Scott Lee, Capital Advertising Expense Accts. Rec.—John Langer

Scott Lee, Withdrawals Maintenance Expense Office Supplies

Instructions Use a form similar to the one below in your working papers. Classify each account and use an “X” to indicate whether the account balance is entered in the Debit or the Credit column of the Trial Balance section. The first account is completed as an example.

Account Name

Classification

Store Equipment

Asset

Trial Balance Debit

Credit

X

Problem 8–2 Analyzing a Source Document Instructions Based on the invoice presented here, answer the following questions in your working papers. 1. 2. 3. 4. 5. 6. 200

Which company shipped the supplies? Which company ordered the supplies? On what date were the supplies received? What does one box of file folders cost? How many ring binders were ordered? What is the invoice number?

Hailey Office Supply

INVOICE NO. 220

2763 East Meadow Ave.

DATE:

Richardson, TX 75080 ORDER NO.:

TO

Garmot Electrical Co. 15638 Lone Star Highway Plano, TX 75074

QTY.

2 1 2 4 4

SHIPPED BY: TERMS:

ITEM

UNIT PRICE

$ 2.94 5.83 1.75 .84 6.23

Ring Binders, 37546 Bond Paper, 27361 Rotary Cards, 62744 Fine-Tip Markers, 28733 File Folders, Box 36206 15/20--

REC'D 6/

Sales Tax Total

June 3, 20-PO304 Truck Net 30

TOTAL

$ 5.88 5.83 3.50 3.36 24.92 $43.49 2.17 $45.66

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 200

9/15/05 1:20:46 PM

SECTION 2

Completing the Work Sheet

In the previous section you learned how to set up the work sheet and prove the Trial Balance section. In this section you will learn how to extend the account balances and compute net income or net loss.

BEFORE YOU

READ

Main Idea

The Balance Sheet and Income Statement Sections What Are the Balance Sheet and Income Statement? The balance sheet and income statement are financial statements prepared at the end of the accounting period. The work sheet organizes the information for these reports.

The Balance Sheet Section The Balance Sheet section of the work sheet contains the asset, liability, and owner’s equity accounts. After proving the Trial Balance section, extend, or transfer, the appropriate amounts to the Balance Sheet section. To do this, copy the Trial Balance section amounts for the asset, liability, and owner’s equity accounts to the appropriate Balance Sheet amount columns. Start with the first account and extend each account balance. Extend debit amounts to the Balance Sheet Debit column. Extend credit amounts to the Balance Sheet Credit column. Figure 8–5 on page 202 shows the balances extended to the Balance Sheet section.

The Income Statement Section The next step in completing the work sheet is to extend the appropriate account balances to the Income Statement section. The Income Statement section contains the revenue and expense accounts. After transferring the asset, liability, and owner’s equity account balances to the Balance Sheet section, extend the revenue and expense account balances to the Income Statement section. Revenue accounts have a normal credit balance, so extend their balances to the Income Statement Credit column. Since expense accounts have a normal debit balance, extend expense account balances to the Debit column of the Income Statement section. Figure 8–6 on page 202 shows the amounts in the Debit and Credit columns of the Income Statement section.

Totaling the Income Statement and Balance Sheet Sections After all amounts have been extended to the Balance Sheet and Income Statement sections, these sections are totaled. A single rule drawn across

After completing the work sheet, you will know the net income or net loss for the accounting period.

Read to Learn…

➤ how amounts are entered

in the work sheet sections. (p. 201) ➤ how to calculate net income. (p. 203) ➤ how to enter totals. (p. 205) ➤ a summary of steps used to prepare a work sheet. (p. 206)

Key Terms

matching principle net income net loss

AS YOU

READ

Compare and Contrast Income Statement and Balance Sheet Sections How are the Income Statement and Balance Sheet sections similar? How are they different?

Section 2 Completing the Work Sheet

194-217_CH08_868829.indd 201

201

4/6/06 5:42:36 PM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

17

DEBIT

CREDIT

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

CREDIT 1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

12 13 14 15 16

39 7 7 5 00

17

18

18

Figure 8–5 Work Sheet with Trial Balance Amounts Extended to Balance Sheet Section

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

17

DEBIT

CREDIT

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

CREDIT 1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

18

12 13 14 15 16 17 18

Figure 8–6 Work Sheet with Trial Balance Amounts Extended to Income Statement Section 202

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 202

9/15/05 1:20:51 PM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

17

TRIAL BALANCE ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

DEBIT

CREDIT

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

CREDIT 1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 1 1 6 5 0 00 25 400 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00

2 650 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

3 9 775 0 0

7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 1 5 0 0 00

12 13 14 15 16

2 6 5 0 00

38 2 7 5 00

37 1 2 5 00

18

17 18

the four Debit and Credit columns indicates that the columns are ready to be added. Unlike the Trial Balance section debit and credit totals, the Debit and Credit column totals in these two sections will not be equal until the net income or net loss for the period is added. See Figure 8–7.

Figure 8–7 Work Sheet with Income Statement and Balance Sheet Sections Totaled

Showing Net Income or Net Loss on the Work Sheet What Is Meant by Net Income or Net Loss? The work sheet’s Income Statement section shows the period’s revenue and expenses. The GAAP matching principle requires matching expenses incurred in an accounting period with the revenue earned in the same period. Matching expenses with revenue gives a reliable measure of profit by showing the dollar value of resources used to produce the revenue. Owners and managers use this information to analyze results and make decisions.

Showing Net Income on the Work Sheet After the Income Statement section columns have been totaled, total expenses (Debit column total) are subtracted from total revenue (Credit column total) to find net income. Net income is the amount of revenue that remains after expenses for the period have been subtracted. Net income is entered as a debit at the bottom of the Income Statement section of the work sheet. Look at Figure 8–8 on page 204. Roadrunner’s net income is $1,150. 1. Skip a line after the last account and write the words Net Income in the Account Name column. A

Connect to…

LANGUAGE ARTS

People often think of accounting as dull and mechanical. Johann von Goethe didn’t. The Romantic author most famous for Faust described Luca Pacioli’s system of accounting as “among the finest inventions of the human mind.”

Section 2 Completing the Work Sheet

194-217_CH08_868829.indd 203

203

9/15/05 1:20:55 PM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

17 18

INCOME STATEMENT

CREDIT

DEBIT

DEBIT

BALANCE SHEET

CREDIT

DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

CREDIT 1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

39 7 7 5 00

Net Income

7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 1 5 0 0 00 1 1 5 0 00

12 13 14 15 16

2 6 5 0 00

38 2 7 5 00

37 1 2 5 00 1 1 5 0 00

19

17 18 19

A

B

Figure 8–8 Partial Work Sheet with Net Income

C

2. On the same line, enter the net income amount in the Income Statement Debit column. B 3. On the same line, enter the net income amount in the Balance Sheet Credit column. C Why is the net income also shown in the Balance Sheet section of the work sheet? Remember, revenue and expense accounts are temporary accounts. As you can see in Figure 8–9, revenues increase capital, while

Figure 8–9 The Effects of Income or Loss on Capital

The Effects of Net Income or Net Loss on Capital

204

,iÛi˜ÕiÃ



Ý«i˜ÃiÃ



iÌʈ˜Vœ“i

>«ˆÌ>Êˆ˜VÀi>ÃiÃ

,iÛi˜ÕiÃ



Ý«i˜ÃiÃ



iÌʏœÃÃ

>«ˆÌ>Ê`iVÀi>ÃiÃ

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 204

9/15/05 1:20:57 PM

expenses decrease capital. Net income, therefore, increases capital since revenues exceed expenses. During the accounting period, revenue and expense amounts are recorded in the temporary accounts (like Delivery Revenue and Utilities Expense). At the end of the period, net income will be transferred to the owner’s capital account. Since the capital account is increased by credits, the amount of the net income is entered in the Credit column of the Balance Sheet section of the work sheet. To check the accuracy of the net income amount in the Balance Sheet section, subtract the total of the Credit column from the total of the Debit column. If the result does not equal net income, there is an error. Before continuing, you must find and correct the error. To find the error, check that the amounts from the Trial Balance section are extended correctly and that the totals of all columns are added correctly.

AS YOU

READ

In Your Experience Revenue and Expenses What types of revenue and expenses would a person your age have?

Figure 8–10 Completed Work Sheet

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

ACCOUNT NAME

Cash in Bank Accts. Receivable—City News Accts. Receivable—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Payable—Beacon Advertising Accounts Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

17

DEBIT

INCOME STATEMENT

CREDIT

BALANCE SHEET CREDIT

DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

39 7 7 5 00

Net Income

18

CREDIT

DEBIT

19

7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 1 5 0 0 00 1 1 5 0 00 2 6 5 0 00

12 13 14 15 16

2 6 5 0 00

38 2 7 5 00

2 6 5 0 00

38 2 7 5 00

37 1 2 5 00 1 1 5 0 00 38 2 7 5 00

20

17

20

A

BD

E

F

G C

Completing the Work Sheet The completed work sheet for Roadrunner is shown in Figure 8–10. To complete the Income Statement and Balance Sheet sections, follow these steps: 1. On the line under the net income amount, draw a single rule across the four columns. D 2. In the Income Statement section Debit column, add the net income amount to the previous total and enter the new total. Bring down Section 2 Completing the Work Sheet

194-217_CH08_868829.indd 205

205

9/15/05 1:20:58 PM

the total of the Income Statement section Credit column. Total debits should equal total credits. E 3. In the Balance Sheet section Credit column, add net income to the previous total and enter the new total. Bring down the total of the Balance Sheet section Debit column. The total debit amount should equal the total credit amount. F 4. In the Balance Sheet and Income Statement sections, draw a double rule under the four column totals. The double rule indicates that the Debit and Credit columns are equal and that no more amounts are to be entered in these columns. G

Showing a Net Loss on the Work Sheet What if total expenses are more than total revenue? When that happens, a net loss occurs. A net loss decreases owner’s equity. This decrease will eventually be shown as a debit to the capital account. When a net loss occurs, the steps to complete the work sheet are the same as described for Net Income except that the words Net Loss are written in the Account Name column. The net loss amount is entered in the Credit column of the Income Statement section and in the Debit column of the Balance Sheet section. The partial work sheet in Figure 8–11 shows a net loss. Expenses exceed revenue by $746.

14 15 16

501 Maintenance Expense 510 Rent Expense 515 Utilities Expense

17 18

3 7 5 00 9 4 0 00 9 7 00 46 4 9 2 00

46 4 9 2 00

3 7 5 00 9 4 0 00 9 7 00 2 5 8 3 00

14 15 16

1 8 3 7 00 7 4 6 00 2 5 8 3 00

Net Loss 2 5 8 3 00

19

27 7 9 1 00 7 4 6 00 28 5 3 7 00

28 5 3 7 00

17 18

28 5 3 7 00

20

19 20

A Figure 8–11 Partial Work Sheet Showing a Net Loss

B

E

F

G DC

A Review of the Steps in Preparing a Six-Column Work Sheet How Do You Prepare a Work Sheet? Follow these steps when preparing a six-column work sheet: 1. Write the heading on the work sheet. 2. In the Account Name and Trial Balance sections, enter the account numbers, names, and balances for all general ledger accounts. 3. Prove the equality of the Trial Balance total debits and total credits. 4. Extend the amounts of the Trial Balance section to the appropriate columns in the Balance Sheet and Income Statement sections. 5. Total the columns in the Income Statement and Balance Sheet sections. 6. Determine the amount of the net income or net loss for the period. 7. Enter the amount of the net income or net loss in the appropriate columns in the Income Statement and Balance Sheet sections. 8. Total and rule the Income Statement and Balance Sheet sections.

206

Chapter 8 The Six-Column Work Sheet

194-217_CH08_868829.indd 206

9/15/05 1:21:00 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one. Fill in the blanks to describe how net income and net loss are shown on the work sheet.

)STHERESULTA NETINCOMEOR ANETLOSS

3ITUATION

%XTENDTOWHICH COLUMNINTHE)NCOME 3TATEMENTSECTION

%XTENDTOWHICH COLUMNINTHE"ALANCE 3HEETSECTION

2EVENUE%XPENSES 2EVENUE %XPENSES

Do the Math For Art’s Sake is a sole proprietorship that sells artwork. The first two quarterly financial statements for this year have been grim. Using the revenue and expense information for the third quarter, calculate the net profit or loss. (Balances of the Accounts Receivable accounts represent third-quarter revenue.) Compare the third-quarter figure with the figures from the first and second quarters. What do you predict the future of For Art’s Sake will be? Third Quarter Rent Expense Utilities Expense Advertising Expense Maintenance Expense Accounts Receivable—Sammy Wong Accounts Receivable—The Artist Collection Accounts Receivable—Vera Samuels

$2,000 800 3,000 1,200 500 5,525 3,200

Second Quarter

Net Loss
$1,200

First Quarter

Net Loss
$2,000

Problem 8–3 Extending Amounts Across the Work Sheet The following accounts have balances and appear in the Account Name section of the work sheet for Lee’s Bike Shop. Store Equipment Rent Expense Service Fees Revenue Accounts Payable—Rubino Supply Scott Lee, Capital

Advertising Expense Accounts Receivable—John Langer Scott Lee, Withdrawals Maintenance Expense Office Supplies

Instructions Use a form similar to the one below in your working papers or on a separate sheet of paper. For the above accounts, enter an “X” in the column where the account balance is transferred. The first account has been completed as an example.

Account Name Store Equipment

Income Statement Debit

Credit

Balance Sheet Debit

Credit

X

Section 2 Completing the Work Sheet

194-217_CH08_868829.indd 207

207

9/15/05 1:21:01 PM

Summary

CH A P T ER 8 Key Concepts

1. Preparing a work sheet is the sixth step in the accounting cycle. The purpose of the worksheet is to gather all the information needed to complete the end-of-period activities. Its heading contains the following information:

The fiscal period covered by the work sheet

Who? What? When?

Name of the business

Name of the accounting form

2. The six-column work sheet has five sections: (a) Heading • Who • What • When (b) Account Name section • Account number • Account name • List all accounts in general ledger order (c) Trial Balance section (d) Income Statement section (e) Balance Sheet section Three of these sections have amount columns. Each of the following sections has a Debit column and a Credit column: • • •

Trial Balance section Income Statement section Balance Sheet section

3. Use the following steps to prepare a work sheet: (a) Create a heading. (b) In the Account Name and Trial Balance sections, enter account numbers, names, and balances. (c) Complete the Trial Balance section, making sure that total debits equal total credits. (d) Extend amounts from the Trial Balance section to the appropriate columns in the Balance Sheet and Income Statement sections. (e) Total the columns in the Income Statement and Balance Sheet columns.

208

Chapter 8 Summary

194-217_CH08_868829.indd 208

9/15/05 1:21:04 PM

Summary

CHAPT E R 8

(f) Calculate the net income or net loss for the period. (g) Enter net income or net loss on the worksheet as follows:

Account Name Net Income

Income Statement Debit

Credit

Balance Sheet Debit

X

Account Name

X

Income Statement Debit

Net Loss

Credit

Balance Sheet

Credit

Debit

X

X

Credit

(h) Total and rule the Income Statement and Balance Sheet sections. 4. The matching principle requires expenses incurred during an accounting period to be matched with revenues earned in the same period. The result is net income or net loss:

If revenue  expenses, then Revenue  Expenses  Net Income If revenue  expenses, then Expenses  Revenue  Net Loss

Key Terms matching principle

(p. 203)

net income

(p. 203)

net loss

(p. 206)

ruling

(p. 199)

work sheet

(p. 197)

Chapter 8 Summary

194-217_CH08_868829.indd 209

209

4/6/06 5:42:49 PM

C H A P T ER 8 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

Purpose of a Work Sheet a. Preparing the work sheet is which step of the accounting cycle? b. What is the purpose of the work sheet? Parts of a Six-Column Work Sheet a. Name and briefly describe the five sections of a six-column worksheet. b. List the items that are included in the work sheet heading. Preparing a Six-Column Work Sheet a. Which section of the work sheet should you complete first? b. Why are all accounts, including those with zero balances, listed on the work sheet? Net Income and Net Loss a. Explain how to record net income or net loss on the work sheet. b. How does net income affect owner’s equity? How does net loss affect owner’s equity?

Apply Key Terms You just finished the work sheet for the third quarter and it looks like your company will make a considerable profit. In the second quarter, the company had a net loss. On a separate sheet of paper, write a memo to your boss, Tonya Newman, asking her to review your trial balance and work sheet. Use the terms listed below in your memo. matching principle net income net loss

210

ruling work sheet

Chapter 8 Review and Activities

194-217_CH08_868829.indd 210

9/15/05 1:21:09 PM

Computerized Accounting

CHAPT E R 8

The Trial Balance Making the Transition from a Manual to a Computerized System Task Preparing the trial balance

Manual Methods • After all journal entries have been posted and all general ledger balances have been updated, list account names and balances on two-column accounting stationery. • List debit balances in one column and credit balances in the other. • Add all debit balances. • Add all credit balances. • Compare the totals. If totals are not in balance, locate and correct any journalizing or posting errors. • The trial balance is correct when total debits equal total credits.

Computerized Methods • Although the Trial Balance is not necessary to check the equality of debits and credits since out-of-balance entries cannot be posted, it is one of the most commonly used accounting statements. It provides a clear list format for reviewing accounts. You can view and print the Trial Balance from the Reports menu.

Q&A Peachtree Question How do I generate a trial balance in Peachtree?

Answer 1. From the Reports menu, select General Ledger. 2. From the Reports list, select General Ledger Trial Balance. 3. Click Print.

QuickBooks Q & A QuickBooks Question How do I generate a trial balance in QuickBooks?

Answer 1. From the Reports menu, select Accountant & Taxes. 2. From the Accountant & Taxes submenu, select Trial Balance. 3. Click Print.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 8 Computerized Accounting

194-217_CH08_868829.indd 211

211

9/15/05 1:21:16 PM

Problems

C H A P T ER 8 Complete problems using:

SPREADSHEET SMART GUIDE

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 8–4 Preparing a Six-Column Work Sheet The ending balances in the general ledger accounts of Wilderness Rentals for the period ended May 31 follow.

Step–by–Step Instructions: Problem 8–4 1. Select the spreadsheet template for Problem 8–4. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

101 105 110 115 120 125 201 203 205 301 305 310 401 501 505 515 525

Debit Balances Cash in Bank $5,814 Accts. Rec.—Helen Katz 717 Accts. Rec.—Polk and Co. 590 Office Supplies 847 Office Equipment 4,360 Camping Equipment 6,130 Accts. Pay.—Adventure Equipment Inc. Accts. Pay.—Digital Tech Computers Accts. Pay.—Greg Mollaro Ronald Hicks, Capital Ronald Hicks, Withdrawals 1,200 Income Summary — Equipment Rental Revenue Advertising Expense 1,940 Maintenance Expense 1,083 Rent Expense 3,500 Utilities Expense 2,164

Credit Balances

$ 1,680 3,554 635 12,760 — 9,716

Instructions Prepare a work sheet for the period ended May 31. 1. Write the heading on the work sheet. 2. List all of the accounts in the Account Name and Trial Balance sections. For each account, include the account number, name, and balance. 3. Total and rule the Trial Balance section. Do total debits equal total credits? If not, find and correct the problem before continuing. 4. Extend the appropriate amounts to the Balance Sheet section. 5. Extend the appropriate amounts to the Income Statement section. 6. Total the amount columns in the Income Statement and Balance Sheet sections. 7. Enter the amount of net income or net loss in the appropriate columns in the Income Statement and Balance Sheet sections. 8. Total and rule the Income Statement and Balance Sheet sections.

Analyze

Identify the permanent accounts on the work sheet that have normal debit balances.

Problem 8–5 Preparing a Six-Column Work Sheet The general ledger for Hot Suds Car Wash shows the following account balances on May 31, the end of the period.

212

CONTINUE

Chapter 8 Problems

194-217_CH08_868829.indd 212

9/15/05 1:21:19 PM

Problems 101 105 110 115 120 125 130 135 201 205 301 305 310 401 405 410 501 505 510 520 530

Cash in Bank Accts. Rec.—Linda Brown Accts. Rec.—Valley Auto Detailing Supplies Detergent Supplies Office Equipment Office Furniture Car Wash Equipment Accts. Pay.—Allen Vacuum Systems Accts. Pay.—O’Brian’s Office Supply Regina Delgado, Capital Regina Delgado, Withdrawals Income Summary Wash Revenue Wax Revenue Interior Detailing Revenue Advertising Expense Equipment Rental Expense Maintenance Expense Rent Expense Utilities Expense

$9,400 429 372 694 418 15,195 2,029 7,486 4,346 2,730 26,530 2,500 7,957 5,329 2,970 1,940 3,836 1,424 3,500 639

Instructions Prepare a work sheet for Hot Suds Car Wash in your working papers.

Analyze

Identify the temporary accounts on the work sheet that have normal credit balances.

Problem 8–6 Preparing a Six-Column Work Sheet The account balances in the general ledger of Kits & Pups Grooming at the end of May are: 101 105 110 115 120 125 130 135 140 145 201 205 207 301 305 310

Cash in Bank Accts. Rec.—Juan Alvarez Accts. Rec.—Nathan Carlsbad Accts. Rec.—Martha Giles Grooming Supplies Office Equipment Office Furniture Computer Equipment Grooming Equipment Kennel Equipment Accts. Pay.—Able Store Equipment Accts. Pay.—Dogs & Cats Inc. Accts. Pay.—Pet Gourmet Abe Shultz, Capital Abe Shultz, Withdrawals Income Summary

$11,194 357 547 1,450 842 4,147 935 2,200 1,948 7,305 7,945 1,205 2,846 23,048 2,500 —

CHAPT E R 8 SMART GUIDE Step–by–Step Instructions: Problem 8–5 1. Select the problem set for Hot Suds Car Wash (Prob. 8–5). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance. 4. Complete the Analyze activity. 5. End the session.

TIP: As a shortcut, you can choose to print the trial balance from the General Ledger Navigation Aid.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 8–5 1. Restore the Problem 8-5.QBB file. 2. Print a Trial Balance. 3. Complete the Analyze question. 4. Back up your work.

SMART GUIDE Step–by–Step Instructions: Problem 8–6 1. Select the problem set for Kits & Pups Grooming (Prob. 8–6). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance. 4. Complete the Analyze activity. 5. End the session.

CONTINUE

Chapter 8 Problems

194-217_CH08_868829.indd 213

213

9/15/05 1:21:20 PM

Problems

C H A P T ER 8 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 8–6 1. Restore the Problem 8-6.QBB file. 2. Print a Trial Balance. 3. Complete the Analyze question. 4. Back up your work.

SMART GUIDE Step–by–Step Instructions: Problem 8–7 1. Select the problem set for Outback Guide Service (Prob. 8–7). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance. 4. Complete the Analyze activity. 5. End the session.

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 8–8 1. Select the spreadsheet template for Problem 8–8. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

401 405 501 505 510 520 530

Boarding Revenue Grooming Revenue Advertising Expense Equipment Repair Expense Maintenance Expense Rent Expense Utilities Expense

11,596 4,496 3,675 932 2,658 7,500 2,946

Instructions Prepare a work sheet for the month ended May 31 for Kits & Pups Grooming in your working papers.

Analyze

Compute the total liabilities for Kits & Pups.

Problem 8–7 Preparing a Six-Column Work Sheet The general ledger account balances on May 31 for Outback Guide Service are: 101 105 125 130 135 140 145 150 205 301 302 310 401 501 505 515 525

Cash in Bank $ 2,834 Accts. Rec.—Mary Johnson 384 Office Supplies 307 Office Equipment 5,902 Office Furniture 2,804 Computer Equipment 3,295 Hiking Equipment 922 Rafting Equipment 8,351 Accts. Pay.—Peak Equipment Inc. 1,204 Juanita Ortega, Capital 20,419 Juanita Ortega, Withdrawals 1,800 Income Summary — Guide Service Revenue 9,179 Advertising Expense 795 Maintenance Expense 125 Rent Expense 2,000 Utilities Expense 1,283

Instructions Prepare a work sheet for Outback Guide Service for the period ended May 31 in your working papers.

Analyze CHALLENGE PROBLEM

Compute the total assets for Outback.

Problem 8–8 Completing the Work Sheet

The work sheet for Job Connect appears in your working papers. The amounts that have been entered are correct. Several amounts, however, are missing from various columns.

Instructions Calculate all missing amounts and complete the work sheet.

Analyze 214

Calculate the owner’s equity. (Hint: Be sure to include the temporary accounts.)

Chapter 8 Problems

194-217_CH08_868829.indd 214

9/15/05 1:21:22 PM

Winning Competitive Events

CHAPTER 8

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. A(n) ________ results when revenue is larger than expenses. a. debit b. net income c. net loss d. credit 2. The asset, liability, and owner’s equity accounts are extended to the ________ of the work sheet. a. Balance Sheet section b. Income Statement section c. Retained Earnings statement d. Trial Balance 3. Revenue and expense accounts are listed in the Trial Balance section of the work sheet and in the ________ of the work sheet. a. Retained Earnings statement b. Balance Sheet section c. Income Statement section d. Accounts Payable section 4. The amount of net income for the period is added to the Balance Sheet credit total because it increases the balance in the ________ account. a. accounts receivable b. accounts payable c. asset d. capital

Business Professionals of America MULTIPLE CHOICE 5. A net loss will appear a. in the debit column of the Income Statement on the work sheet. b. in the credit column of the Income Statement on the work sheet. c. in the debit column of the Trial Need More Help? Balance. Go to glencoeaccounting.glencoe.com and d. on the Post-Closing Trial click on Student Center. Click on Winning Balance. Competitive Events and select Chapter 8. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

194-217_CH08_868829.indd 215

Chapter 8 Winning Competitive Events

215

10/13/05 10:08:01 PM

C H A P T ER 8 Critical Thinking

The Six-Column Work Sheet

CASE

Service Business: Advertising Agency

a mattoefr

STUDY

ETHICS

))

$ )) Communicating ACCOUNTING

216

Real-World Applications and Connections

1. Name the types of accounts whose balances are extended to the Income Statement section of the work sheet. 2. Explain why the Trial Balance section is completed first. 3. What items do you need to complete the six-column work sheet? Include office supplies and forms as well as any information that will be needed. 4. Why is the net income amount entered in the Credit column of the Balance Sheet section? Why is net loss entered in the Debit column? 5. Predict what would happen if a revenue account balance were not extended to the Income Statement section of the work sheet. 6. What is the value of the matching principle? You work for Creative Advertising as an assistant to the company’s accountant. You are preparing a work sheet for the month of July. The trial balance totals are $127,750, and you have extended the account balances to the amount columns in the Balance Sheet and Income Statement sections. After adding the Balance Sheet and Income Statement columns and calculating net income, you find that the totals do not balance. INSTRUCTIONS 1. List the steps you would take to find the problem. 2. Provide a likely reason to explain why the net income amounts do not match.

Padding Expense Accounts Imagine that you are employed as an auditor for a public accounting firm like PricewaterhouseCoopers. You and a co-worker, Mark, have been sent to Chicago to perform an audit. You have an allowance of $200 a day to cover lodging, meals, and transportation. At the end of the trip, you are to turn in an expense account report detailing how you spent the allowance. Mark adds a few dollars to each of his expenses so he can have some extra cash. You figure that the firm will not miss a few dollars, so you consider doing the same. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Creating a Handout Your accounting firm, AccountFast, volunteered to provide mentors to area schools for accounting and math programs. As a mentor, you are assigned to work with three accounting students. Your topic for this week is “Ruling and Totaling the Trial Balance.” Create a handout to explain and illustrate this topic. Use any company, accounts, and account balances you wish. Remember, it is helpful to provide step-by-step instructions.

Chapter 8 Real-World Applications and Connections

194-217_CH08_868829.indd 216

9/15/05 1:21:25 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Understanding Organizational Systems • Can you read and interpret a company’s organizational chart? • Can you identify who reports to whom? If you can answer “yes” to these questions, then you can probably work and operate effectively within an organizational system. ON THE JOB Your employer, The Teen Scene, was just bought out by a large, national clothing chain—Natural Fibers. The buyout has created a huge reorganization. INSTRUCTIONS 1. The change from a small clothing store to a national chain store has affected employee morale. What do you think would help build loyalty to Natural Fibers? 2. How would an organizational chart that depicts who reports to whom help with the transition?

Time Zones What time is it now on your watch? What time is it in London or New York? Without knowledge of the world’s time zones, the international businessperson may have difficulty contacting a person at the right place and the right time. There are 24 time zones in the world, each representing 15 degrees of longitude, or one hour intervals. INSTRUCTIONS Imagine that your company has manufacturing locations in Dublin, Ireland and Denver, Colorado. Managers work from 8:00 a.m. to 3:30 p.m. at both locations. Dublin is 7 hours behind Denver. Schedule a telephone meeting so that both managers are present. What will you need to consider when scheduling the meeting?

Your Savings A business needs to save for expansion and unexpected expenses. You also need to save to have money available when you want or need something. Without savings, both you and a business could have a difficult time. PERSONAL FINANCE ACTIVITY List some typical cash expenditures a high school student might have in an average week. Include the amount spent on each item. Identify the items that could be easily eliminated or reduced. By reducing this spending, how much money would be saved in one year? PERSONAL FINANCE ONLINE Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 8.

glencoeaccounting.glencoe.com

194-217_CH08_868829.indd 217

CHAPT E R 8

Chapter 8 Real-World Applications and Connections

217

9/15/05 1:21:28 PM

CH A P T ER 9

Financial Statements for a Sole Proprietorship BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the purpose of the income statement.

2.

Prepare an income statement.

3.

Explain the purpose of the statement of changes in owner’s equity.

1. 2. 3. 4.

4.

Prepare a statement of changes in owner’s equity.

5.

Explain the purpose of the balance sheet.

6.

Prepare a balance sheet.

7.

Explain the purpose of the statement of cash flows.

8.

Explain ratio analysis and compute ratios.

9.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

Financial statements provide essential information for making sound decisions.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business PREPARING FINANCIAL STATEMENTS

Tapatío Hot Sauce Company Not all businesses take off like wildfire. Some begin modestly, like Tapatío Hot Sauce Company. Jose-Luis Saavedra Sr. started it in 1971 in a tiny warehouse. He drove his own van for deliveries to stores and restaurants. As Tapatío grew, Saavedra enlisted family to help meet the increased product demand. His son Jose-Luis Jr., a physician, became Tapatío’s general manager. Daughter Dolores uses her law degree to handle the company’s legal matters, and daughter Jacquie runs the office. Today the company owns a state-of-the-art facility with a fully automated production line. Early on, Tapatío’s revenues were small, and its financial statements were simple compared to those it prepares now to reflect the company’s national and international distribution of its hot sauce.

What Do You Think? What types of accounts do you think Tapatío used in 1971? What accounts do you think have been added?

218

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 218

4/6/06 5:43:41 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE A sole proprietorship can be a small business with a few employees or a large business with thousands of employees. In a small business, one person may handle the accounting duties. A larger business might have several employees working in an accounting department. Whether large or small, the preparation of financial statements is an important task.

glencoeaccounting.glencoe.com

218-247_CH09_868829.indd 219

Personal Connection 1. In your work location, approximately how many people are employed? 2. If you were an accountant, do you think you would prefer to work for a large organization or a small one? Why?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 9.

219

8/29/05 1:11:28 PM

SECTION 1

BEFORE YOU

READ

Main Idea

The income statement reports the net income or net loss for an accounting period.

Read to Learn…

➤ the four financial

statements prepared for a business. (p. 220) ➤ how to prepare an income statement. (p. 221)

Key Terms

financial statements income statement

The Income Statement To operate a business profitably, the owner needs to have current financial information. Businesses ranging from an oil company to a dairy farm must organize financial information to evaluate profits or losses. Financial statements summarize the changes resulting from business transactions that occur during an accounting period. As you can see in Figure 9–1, preparing financial statements is the seventh step in the accounting cycle. Analyze each transaction

Collect and verify source documents

ACCOUNT DEBIT

ACCOUNT DEBIT

2

MEMORANDUM

1 9 GENERAL JOURNAL

Figure 9–1 The Accounting Cycle with the Seventh Step Highlighted

Prepare a post-closing trial balance

GENERAL JOURNAL

CREDIT

INVOICE RECEIPT

POST-CLOSING TRIAL BALANCE

Journalize each transaction

8

LEDGER

Journalize and post closing entries

3

CREDIT

Post to the ledger LEDGER

4

6

7

5 TRIAL BALANCE

WORK SHEET

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER'S EQUITY

BALANCE SHEET

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

Financial Statements What Are the Four Financial Statements? The primary financial statements prepared for a sole proprietorship are the income statement and the balance sheet. Two other statements, the statement of changes in owner’s equity and the statement of cash flows, are also often prepared. The financial statements may be handwritten or typed but most often are prepared on a computer. With a computerized accounting system, the business owner can generate financial statements without first preparing a work sheet. Let’s learn how to prepare financial statements for a service business such as Roadrunner Delivery Service. 220

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 220

8/29/05 1:12:04 PM

The Income Statement

AS YOU

What Is the Purpose of the Income Statement? The income statement reports the net income or net loss for a specific period of time. As you recall from Chapter 8, net income or net loss is the difference between total revenue and total expenses. For this reason the income statement is sometimes called a profit-and-loss statement or an earnings statement.

READ

Key Point Income Statement The income statement covers a specific period of time.

Income Statement Sections The income statement contains the following sections: • • • •

the heading the revenue for the period the expenses for the period the net income or net loss for the period

Heading. Like the work sheet heading, the heading of an income statement has three parts: 1. The name of the business (Who?) 2. The name of the report (What?) 3. The period covered (When?)

❶ (Who?) The heading for Roadrunner’s income statement is shown in Figure 9–2. Each line of the heading is centered on the width of the statement. ➋ (What?) When preparing an ➌ (When?) income statement heading, Roadrunner Delivery Service be sure to follow the wording Income Statement and capitalization shown in For the Month Ended October 31, 20-Figure 9–2. The date line is especially important because the reporting period varies from business to business. Figure 9–2 The Heading A business owner uses for an Income Statement the same accounting periods year after year. This consistency allows the owner to compare the information from one period to the next. Revenue Section. After the heading has been completed, enter the revenue earned for the period. Look at Figure 9–3 on page 222. The information used to prepare the income statement comes from the Income Statement section of the work sheet. Roadrunner’s income statement is prepared on standard accounting stationery, which has a column for account names and two amount columns. The first amount column is used to enter the balances of the individual revenue and expense accounts. The second amount column is used to enter totals: total revenue, total expenses, and net income (or net loss). Refer to Figure 9–3 as you read the procedures for preparing an income statement: 1. Write Revenue: on the first line at the left side of the form. A 2. Enter the revenue account names beginning on the second line, indented about a half inch from the left edge of the form. B

Section 1 The Income Statement

218-247_CH09_868829.indd 221

221

8/29/05 1:12:14 PM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

17 18

DEBIT

CREDIT

INCOME STATEMENT

BALANCE SHEET

CREDIT

DEBIT

DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

CREDIT 1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 39 7 7 5 00

39 7 7 5 00

Net Income

19

7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 1 5 0 0 00 1 1 5 0 00 2 6 5 0 00

12 13 14 15 16

2 6 5 0 00

38 2 7 5 00

2 6 5 0 00

38 2 7 5 00

20

37 1 2 5 00 1 1 5 0 00 38 2 7 5 00

17 18 19 20

Roadrunner Delivery Service Income Statement For the Month Ended October 31, 20-Revenue: A Delivery Revenue B Expenses: D Advertising Expense Maintenance Expense E Rent Expense Utilities Expense Total Expenses G Net Income K

Figure 9–3 Preparing an Income Statement

2 6 5 0 00 C

F

75 600 700 125

00 00 00 00

E H 1 5 0 0 00 J 1 1 5 0 00 I L

3. Enter the balance of each revenue account. Since Roadrunner has only one revenue account, Delivery Revenue, total revenue is the same as the balance of the one revenue account. The balance is thus written in the second, or totals, column. C Many businesses have more than one source of revenue and thus have a separate revenue account for each source. For example, a swim club might have accounts such as Membership Fees and Pool Rental. Figure 9–4 illustrates the Revenue section of the income statement for a business with more than one revenue account. Notice that the words Total Revenue are indented about one inch from the left edge of the form.

222

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 222

8/29/05 1:12:34 PM

Expenses Section.

Revenue: The expenses incurred during Rental Revenue the period are reported next. Repair Revenue The expense account names Total Revenue and the balances in the Income Statement section of the work sheet are used to prepare the Expenses section of the income statement. Refer to Figure 9–3 as you read the following instructions:

11 2 3 0 00 4 8 5 0 00 16 0 8 0 00

Figure 9–4 Income Statement with More Than One Revenue Account

1. On the line following the revenue section, write Expenses: at the left side of the form. D 2. On the following lines, write the names of the expense accounts, indented half an inch, in the order that they appear on the work sheet. Since there are several expense accounts, enter the individual balances in the first amount column. E 3. Draw a single rule under the last expense account balance. F 4. Write the words Total Expenses on the line following the last expense account name, indented about one inch. G 5. Add the balances for all expense accounts. Write the total expenses amount in the second amount column, one line below the last expense account balance. H

Net Income Section. The next step is to enter net income. Net income, remember, occurs when total revenue is more than total expenses. Refer to Figure 9–3 as you read the following instructions for the preparation of the Net Income section. 1. Draw a single rule under the total expenses amount. I 2. Subtract the total expenses from the total revenue to find net income. Enter the net income in the second amount column under the total expenses amount. J 3. On the same line, write Net Income at the left side of the form. K 4. If the amount of net income matches the amount on the work sheet, draw a double rule under the net income amount. L

Reporting a Net Loss If total expenses are more than total revenue, a net loss exists. To determine the amount of net loss, subtract total revenue from total expenses. Enter the net loss in the second amount column under the total expenses amount. Write the words Net Loss on the same line at the left side of the form. Figure 9–5 illustrates how to report a net loss.

AS YOU

READ

In Your Experience Financial Reports What kinds of financial reports would a high school student be familiar with?

Revenue: Delivery Revenue

3 1 7 0 00

Expenses: Advertising Expense Maintenance Expense Miscellaneous Expense Rent Expense Utilities Expense Total Expenses

27 75 27 190 32

5 0 0 0 5

00 00 00 00 00 3 5 2 0 00

Net Loss

3 5 0 00

Figure 9–5 Income Statement Showing a Net Loss

Section 1 The Income Statement

218-247_CH09_868829.indd 223

223

8/29/05 1:12:35 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Using a diagram like this one, summarize the steps for creating an income statement. Add answer boxes for steps as needed.

#REATINGAN)NCOME3TATEMENT

Do the Math Earth-Friendly Cleaning Service prepares monthly financial statements. The two revenue accounts show ending balances of $8,740.00 and $2,080.00. The following expense account balances also appear in the Income Statement section of this month’s work sheet. Advertising Expense Maintenance Expense Miscellaneous Expense Rent Expense Utility Expense

$3,690.00 2,745.00 605.00 3,400.00 985.00

Calculate the amount of net income or net loss for the month.

Problem 9–1 Analyzing a Source Document Instructions Based on the receipt shown here, answer the following questions in your working papers. 1. What is the name of the business that received the money? 2. How much money was received? 3. Who paid the Stratford Learning Center money? 243 Eastern Road 4. Why was the money Roxbury, NY 14752 paid? 5. When was the Sandra Miller RECEIVED FROM payment made? Eight hundred thirty-two and no/100 6. Who received the On account FOR money and made out the receipt? 7. Where is the business RECEIVED BY that received the money located?

224

RECEIPT No. 1834

Aug. 21

20 --

$ 832.00 DOLLARS

Rose Hughes

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 224

8/29/05 1:12:39 PM

SECTION 2

The Statement of Changes in Owner’s Equity

An important concern of a business owner is whether the owner’s equity has increased or decreased during the period. An increase in owner’s equity means the owner’s claims to the assets of the business have grown. A decrease means the owner’s claims to the assets of the business have been reduced.

The Statement of Changes in Owner’s Equity Where Do You Find the Information Needed to Prepare This Financial Statement? The statement of changes in owner’s equity summarizes changes in the owner’s capital account as a result of business transactions that occur during the period. Eventually, the balances of revenues, expenses, and the owner’s withdrawal account will be transferred to the owner’s capital account. This statement is prepared at the end of the accounting period. The heading of the statement of changes in owner’s equity is set up in the same manner as the heading for the income statement. 1. The first line consists of the name of the business. (Who?) 2. The second line indicates the name of the statement. (What?) 3. The third line indicates the period covered. (When?)

BEFORE YOU

READ

Main Idea

The statement of changes in owner’s equity shows how the owner’s financial interest changed during the accounting period.

Read to Learn… ➤ the purpose of the

statement of changes in owner’s equity. (p. 225) ➤ how to prepare the statement of changes in owner’s equity. (p. 225)

Key Terms

statement of changes in owner’s equity

Because the statement of changes in owner’s equity and the income statement cover the same period, the third line of the heading of both statements will include the same wording and date. The information to prepare this statement is found in three places: • • •

the work sheet the income statement the owner’s capital account in the general ledger

Completing the Statement of Changes in Owner’s Equity How Do You Prepare This Financial Statement? Look at Figure 9–6 on page 226. It is the statement of changes in owner’s equity for Roadrunner Delivery Service for the month ended October 31. The illustration shows the steps needed to complete this financial statement.

AS YOU

READ

Key Point Statement of Changes in Owner’s Equity The statement of changes in owner’s equity covers the same time period as the income statement.

Section 2 The Statement of Changes in Owner’s Equity

218-247_CH09_868829.indd 225

225

8/29/05 1:12:43 PM

Roadrunner Delivery Service Statement of Changes in Owner’s Equity For the Month Ended October 31, 20-Beginning Capital, October 1, 20-- A

C Add: Investments by Owner

Net Income Total Increase in Capital Subtotal Less: Withdrawals by Owner Ending Capital, October 31, 20--

Figure 9–6 Statement of Changes in Owner’s Equity

B

D 25 4 0 0 00 E 1 1 5 0 00 26 5 5 0 26 5 5 0 500 26 0 5 0

I

00 00 00 00

F G H J

1. On the first line, write the words Beginning Capital followed by a comma and then by the first day of the period. For Roadrunner that date is October 1, 20--. A 2. In the second amount column, enter the balance of the capital account at the beginning of the period. The source of this information is the capital account in the general ledger. Since Roadrunner was formed after the beginning of the period, there is no beginning capital balance. Place a line in the second amount column. B 3. Next, enter the increases to the capital account: • investments by the owner • net income

AS YOU

READ

Compare and Contrast Income Statement and Statement of Changes in Owner’s Equity In what ways are the income statement and statement of changes in owner’s equity similar? How are they different?

226

Investments made by the owner during the period are recorded in the capital account. Maria Sanchez, the owner of Roadrunner, invested a total of $25,400 during October. This includes $25,000 cash and two phones valued at $400. Write Add: Investments by Owner. C Enter the total investment in the first amount column. D On the next line, write the words Net Income. Indent so that Net Income aligns on the left with Investments by Owner in the line above. In the first amount column, enter the net income amount from the income statement. Draw a single rule under the net income amount. E 4. Write the words Total Increase in Capital on the next line at the left side of the form. Add the investments by owner and net income amounts and enter the total in the second amount column. Draw a single rule under the amount. F 5. Write Subtotal on the next line, at the left side of the form. Add the amounts for beginning capital and total increase in capital. Enter the result in the second amount column. G 6. The next section of the statement lists the decreases to the capital account: • withdrawals • net loss Since Roadrunner did not have a net loss for the period, write the words Less: Withdrawals by Owner at the left side of the form. Find

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 226

8/29/05 1:12:48 PM

the withdrawals amount on the work sheet. Enter the withdrawals amount in the second amount column. Draw a single rule under the withdrawals amount. H 7. On the next line, at the left side of the form, write the words Ending Capital followed by a comma and the last day of the period. I 8. Subtract the withdrawals amount from the subtotal to determine the ending balance of the capital account. Finally, draw a double rule below the ending capital amount. J

Statement of Changes in Owner’s Equity for an Ongoing Business To prepare the statement of changes in owner’s equity, you need to know the beginning balance of the owner’s capital account. For an ongoing business, the balance entered on the work sheet for the capital account may not be the balance at the beginning of the period. If the owner made additional investments during the period, the investments would be recorded in the general journal, posted to the general ledger, and included in the amount shown on the work sheet. For example, suppose the owner of Garo’s Tree Service, James Garo, invested an additional $1,000 during the period. Look at Figure 9–7. The ledger account reflects the additional capital investment. The amount entered on the work sheet for James Garo, Capital includes the balance at the beginning of the period ($23,800) and the investment made during the period ($1,000). ACCOUNT James Garo, Capital DATE

20-Apr.

ACCOUNT NO. 301 BALANCE

POST. REF.

DESCRIPTION

1 Balance 15

DEBIT

CREDIT

✓ G1

DEBIT

CREDIT

23 8 0 0 00 24 8 0 0 00

1 0 0 0 00

Garo’s Tree Service Work Sheet For the Month Ended April 30, 20-TRIAL BALANCE

ACCT. NO.

ACCOUNT NAME

13

301 James Garo, Capital 302 James Garo, Withdrawals

20

525 Utilities Expense

12

21 22 23

Net Income

INCOME STATEMENT

CREDIT

DEBIT

DEBIT

CREDIT

BALANCE SHEET DEBIT

24 8 0 0 00

24 8 0 0 00 7 0 0 00 6 2 0 00 21 9 2 4 00

CREDIT

7 0 0 00

21 9 2 4 00

6 2 0 00 6 0 3 3 00 3 2 7 6 00 9 3 0 9 00

12 13

20

9 3 0 9 00 29 8 7 7 00 26 6 0 1 00 3 2 7 6 00 9 3 0 9 00 29 8 7 7 00 29 8 7 7 00

24

21 22 23 24

Figure 9–7 Statement of Changes in Owner’s Equity for an Ongoing Business

Section 2 The Statement of Changes in Owner’s Equity

218-247_CH09_868829.indd 227

227

8/29/05 1:12:51 PM

Garo’s Tree Service Statement of Changes in Owner’s Equity For the Month Ended April 30, 20-Beginning Capital, April 1, 20-Add: Investments by Owner Net Income Total Increase in Capital Subtotal Less: Withdrawals by Owner Ending Capital, April 30, 20--

23 8 0 0 00 1 0 0 0 00 3 2 7 6 00 4 276 28 0 7 6 700 27 3 7 6

00 00 00 00

Figure 9–7 Statement of Changes in Owner’s Equity for an Ongoing Business (continued) There are two ways to determine the owner’s capital account balance at the beginning of the period: • •

Look at the ledger. Subtract the additional investments from the account balance shown on the work sheet. For James Garo, Capital, the $1,000 additional investment in Garo’s Tree Service is subtracted from the $24,800 account balance shown on the work sheet to arrive at the beginning account balance of $23,800. Figure 9–7 shows the statement of changes in owner’s equity for an ongoing business.

Statement of Changes in Owner’s Equity Showing a Net Loss Figure 9–8 shows a statement of changes in owner’s equity for an ongoing business with a net loss. Notice that since there is only one item that increases capital—investments by owner—the amount of the individual item is entered in the second amount column. Since there are two items that decrease capital—withdrawals by owner and net loss—the amounts of the individual items are entered in the first amount column. The total decrease in capital is entered in the second amount column. Island Burgers Statement of Changes in Owner’s Equity For the Month Ended April 30, 20-Beginning Capital, April 1, 20-Add: Investments by Owner Subtotal Less: Withdrawals by Owner Net Loss Total Decrease in Capital Ending Capital, April 30, 20--

13 8 4 8 00 1 5 0 0 00 15 3 4 8 00 9 0 0 00 8 3 5 00 1 7 3 5 00 13 6 1 3 00

Figure 9–8 Statement of Changes in Owner’s Equity Showing a Net Loss 228

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 228

8/29/05 1:12:52 PM

Assessment

SECTION 2 AFTER YOU

READ

Reinforce the Main Idea Using a diagram like this one, summarize the steps for creating a statement of changes in owner’s equity. Add answer boxes for steps as needed.

#REATINGA3TATEMENTOF#HANGESIN/WNERS%QUITY

Do the Math Tracy Murphy is a fashion designer who works from her home. She contributed her own funds and equipment to the business. She also continues to add new clients and increase her revenue. Tracy’s investments in her business and the revenue she has earned over the past 10 months are shown below. Create a line graph, by date, comparing Tracy’s investments to her revenue. What can you determine from this chart? Revenue 2/01/20-3/01/20-4/01/20-5/01/20-6/01/20-7/01/20-8/01/20-9/01/20-10/01/20--

Investments 1/01/20-- Cash $20,000 1/01/20-- Sewing machines 6,000 1/01/20-- Mannequins 3,500 1/01/20-- Material 25,000 1/01/20-- Computer equipment 5,600 1/01/20-- Business cards 500 2/15/20-- Cash 12,000 3/10/20-- Material 7,500 Total Investments

$80,100

$ 5,000 6,000 12,000 15,000 17,500 19,000 20,000 26,000 20,000

Problem 9–2 Determining Ending Capital Balances The financial transactions affecting the capital accounts of several different businesses are summarized below.

Instructions Use the form in your working papers. Determine the ending capital balance for each business. Beginning Capital 1. 2. 3. 4. 5. 6.

$60,000 24,075 28,800 0 6,415 20,870

Investments $

500 0 1,000 10,500 0 1,300

Revenue

Expenses

Withdrawals

$ 5,100 13,880 6,450 5,320 4,520 13,980

$2,400 7,240 6,780 4,990 3,175 9,440

$ 700 800 0 200 700 1,700

Section 2 The Statement of Changes in Owner’s Equity

218-247_CH09_868829.indd 229

229

8/29/05 1:13:29 PM

Accounting Careers in Focus PARTNER

PricewaterhouseCoopers LLP, New York, New York Alfred A. Peguero Q: What is your main responsibility? A: My job is to help the families and privately held corporations who are my clients. I look behind the numbers to show clients how to protect assets and pass them to the next generation. I always ask myself what needs to be done to ensure that client expectations are met. Being a partner is very much like owning your own business—with some constraints, of course.

Q: How did you become interested in accounting? A: I was an economics major in college, but in my senior year I

.. Tips from . not all a A paycheck is ms offer. Many fir company can g rofit-sharin also provide p t, reimbursemen plans, tuition pportunities. and training o benefits a Consider the ployer offers prospective em g whether to when decidin ffer. accept a job o

took two accounting classes that I really enjoyed. I realized this is where the opportunities are. Accounting as a general profession is very broad. The basic principles are the same but you can focus on areas and industries that really interest you—anything from technology to farming.

Q: Which skills are most important? A: Analytical, reasoning, and communication skills are critical. Mathematical ability is also helpful.

Q: What do you enjoy most about your job? A: I enjoy offering solutions to my clients. Helping real people solve their problems and achieve peace of mind over their financial matters is very rewarding.

Q: What advice do you have for accountants just beginning their careers? A: Finding a good mentor is really important. Always follow through with what you say you’re going to do and don’t be afraid to ask questions.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Specialize in personal financial and business consulting; advise clients on complex accounting issues. Training or Education Needed: A bachelor’s degree in business administration, accounting, or economics; a minor in communications and technology can be helpful; fulfill the requirements to become a CPA. Aptitude, Abilities and Skills: Communication, analytical, reasoning, and math skills. Salary Range: $150,000 and up depending on experience, level of responsibility, and firm performance. Career Path: Gather hands-on experience with a major accounting firm or reputable regional firm. Once you have a flavor for the areas that most appeal to you, consider getting a master’s degree. It usually takes 10 to 15 years to become a partner at most firms.

Thinking Critically 230

What qualities do you think employers look for when hiring?

Chapter 9 Accounting Careers in Focus

218-247_CH09_868829.indd 230

8/29/05 1:13:33 PM

SECTION 3

The Balance Sheet and the Statement of Cash Flows

The third and fourth financial statements prepared at the end of the period are the balance sheet and the statement of cash flows. The balance sheet reflects the accounting equation at the end of the period. The statement of cash flows shows how the business acquired and spent cash during the period.

The Balance Sheet What Is the Purpose of the Balance Sheet?

BEFORE YOU

READ

Main Idea

The balance sheet reports the financial position at a specific point in time. The statement of cash flows reports the sources and uses of cash during the accounting period.

The balance sheet is a report of the balances in the permanent accounts at the end of the period. The main purpose of the balance sheet is to report the assets of the business and the claims against those assets on a specific date. In other words, the balance sheet states the financial position of a business at a specific point in time. The balance sheet summarizes the following information:

Read to Learn…

• • •

balance sheet report form statement of cash flows ratio analysis profitability ratio return on sales

what a business owns what a business owes what a business is worth

For this reason the balance sheet is sometimes called a statement of financial position. The balance sheet is prepared from information in the Balance Sheet section of the work sheet and from the statement of changes in owner’s equity. The balance sheet may be handwritten, typed, or, as in most cases, prepared by computer.

➤ how to prepare a balance sheet.

(p. 231) ➤ the purpose of a statement of cash

flows. (p. 234) ➤ how to perform ratio analysis. (p. 235)

Key Terms

current assets current liabilities working capital liquidity ratio current ratio quick ratio

The Sections of the Balance Sheet The balance sheet contains the following sections: • • •

the heading the assets section the liabilities and owner’s equity sections

Heading. Like the heading of the income statement, the heading of the balance sheet answers the questions who? what? when? The balance sheet heading includes: 1. The name of the business (Who?) 2. The name of the financial statement (What?) 3. The date of the balance sheet (When?)

AS YOU

READ

Install Recall Permanent Accounts Permanent accounts are assets, liabilities, and the owner’s capital account.

Section 3 The Balance Sheet and the Statement of Cash Flows

218-247_CH09_868829.indd 231

231

8/29/05 1:13:39 PM

Roadrunner Delivery Service Balance Sheet October 31, 20--

Point in Time

Roadrunner Delivery Service Income Statement For the Month Ended October 31, 20--

Period of Time

Figure 9–9 Headings of Financial Statements

AS YOU

READ

Key Point Balance Sheet The balance sheet is a “snapshot” of a business at a specific point in time.

Unlike the income statement, which covers the entire period, the balance sheet relates to a specific point in time. The amounts shown on the balance sheet are the general ledger balances in the accounts on the last day of the period. Notice the difference between the date lines on the balance sheet and on the income statement in Figure 9–9. Assets Section. Refer to Roadrunner’s balance sheet in Figure 9–10 as you read how to prepare the balance sheet. Roadrunner’s work sheet and statement of changes in owner’s equity are also included to show the information sources used to prepare the balance sheet. Roadrunner’s balance sheet is prepared in report form , listing the balance sheet sections one under the other. The Assets section of the balance sheet is prepared as follows: 1. Write the word Assets on the first line in the center of the column containing the account names. A 2. On the following lines, list each asset account name and its balance in the same order as they appear in the Balance Sheet section of the work sheet. Enter the account balances in the first amount column. Draw a single rule under the last account balance. B 3. On the next line, write the words Total Assets, indented about half an inch. Add the individual asset balances and enter the total in the second amount column. C Do not draw a double rule under the total yet. Enter it when the Liabilities and Owner’s Equity sections are complete and equal to total assets. Liabilities and Owner’s Equity Sections. The information for the Liabilities and Owner’s Equity sections is taken from the work sheet and from the statement of changes in owner’s equity. Use the following steps to complete the Liabilities and Owner’s Equity sections. 1. On the line after Total Assets, write the heading Liabilities in the center of the column containing the account names. D 2. On the following lines, list the liability account names and their balances in the same order as on the Balance Sheet section of the work sheet. Enter the account balances in the first amount column. Draw a single rule under the last account balance. E

232

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 232

4/6/06 5:44:27 PM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-ACCT. NO.

9 10 11 12 13 14 15 16

101 105 110 115 120 125 201 205 301 302 303 401 501 505 510 515

17 18 19 20

TRIAL BALANCE ACCOUNT NAME

Cash in Bank Accts. Rec.—City News Accts. Rec.—Green Company Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

DEBIT

CREDIT

INCOME STATEMENT DEBIT

BALANCE SHEET

CREDIT

CREDIT

DEBIT

21 1 2 5 00 1 4 5 0 00

21 1 2 5 00 1 4 5 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

3 0 0 0 00 2 0 0 00 12 0 0 0 00

1 2 3 4 5 6

7 5 00 11 6 5 0 00 25 4 0 0 00

7 5 00 11 6 5 0 00 25 4 0 0 00 5 0 0 00

5 0 0 00

7 8 9 10 11

2 6 5 0 00

2 6 5 0 00

7 5 00 7 5 00 6 0 0 00 6 0 0 00 7 0 000 7 0 000 Roadrunner Delivery Service 1 2 500 2 500 Statement of Changes in Owner’s 1Equity 39 7 7 500 1 5 0 000 39 7 7 500 For the Month Ended October 31, 20-1 1 5 000 Net Income Beginning Capital, October 1, 20-2 6 5 000 Add: Investments by Owner 25 4 0 0 1 150 Net Income Total Increase in Capital Subtotal Less: Withdrawals by Owner Ending Capital, October 31, 20--

12 13 14 15 16

2 6 5 000

37 1 2 5 00 1 1 5 0 00 38 2 7 5 00

38 2 7 500

2 6 5 000 38 2 7 500 00 00 26 5 5 0 00 26 5 5 0 00 5 0 0 00 26 0 5 0 00

17 18 19 20

Roadrunner Delivery Service Balance Sheet October 31, 20--

A Assets Cash in Bank Accounts Receivable—City News B Accounts Receivable—Green Company Computer Equipment Office Equipment Delivery Equipment C Total Assets D Liabilities Accounts Payable—Beacon Advertising E Accounts Payable—North Shore Auto F Total Liabilities G Owner’s Equity H Maria Sanchez, Capital I Total Liabilities and Owner’s Equity

21 1 2 5 00 1 4 5 0 00

H

3 0 0 0 00 2 0 0 00 12 0 0 0 00 37 7 7 5 00

K

7 5 00 11 6 5 0 00 11 7 2 5 00

J

26 0 5 0 00 37 7 7 5 00

K

Figure 9–10 Preparing a Balance Sheet Section 3 The Balance Sheet and the Statement of Cash Flows

218-247_CH09_868829.indd 233

233

8/29/05 1:13:59 PM

3. On the next line, write the words Total Liabilities, indented about half an inch. Add the individual liability balances and enter the total in the second amount column. F 4. On the next line, enter the heading Owner’s Equity in the center of the column containing the account names. G 5. On the next line, write the name of the capital account. In the second amount column, enter the ending balance of the capital account as shown on the statement of changes in owner’s equity. H

Proving the Equality of the Balance Sheet Recall that the basic accounting equation must always be in balance. The balance sheet represents the basic accounting equation, so the Assets section total must equal the total of the Liabilities and Owner’s Equity sections. Assets
Liabilities  Owner’s Equity To prove the equality of the balance sheet, follow these steps: 1. Draw a single rule under the balance of the capital account. On the next line, write the words Total Liabilities and Owner’s Equity, indented about half an inch. I 2. Add the total liabilities amount and the ending capital balance. Enter the total in the second amount column. J This total must equal the total assets amount. If the totals are not equal, there is an error. Most errors occur when transferring amounts from the work sheet or from the statement of changes in owner’s equity. Verify that each account balance has been transferred properly. Find and correct the error and then complete the balance sheet. 3. When total assets equal total liabilities and owner’s equity, draw a double rule under the total assets amount and under the total liabilities and owner’s equity amount. K The balance sheet is now complete. Refer again to the amounts and their placement in Figure 9–10. As you can see, completion of the work sheet is the basis for preparing the three financial statements studied so far.

The Statement of Cash Flows What Is the Purpose of the Statement of Cash Flows? Cash flowing through a business is like blood flowing through your body. The flow of cash keeps a business alive. It is essential to have cash available for the daily operations of the business and for unexpected expenses. The statement of cash flows summarizes the following information: • • • •

the amount of cash the business took in the sources of cash the amount of cash the business paid out the uses of cash

Like the income statement, the statement of cash flows covers a single accounting period.

234

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 234

8/29/05 1:13:59 PM

This information is essential for sound management and investment decisions. You will learn more about the statement of cash flows in Chapter 19.

Ratio Analysis What Is Ratio Analysis? Ratio analysis is the process of evaluating the relationship between various amounts in the financial statements. Owners and managers use ratio analysis to determine the financial strength, activity, and debt-paying ability of a business.

Profitability Ratios

MATH HINTS

Profitability ratios are used to evaluate the earnings performance of the business during the accounting period. The earning power of a business is an important measure of its ability to grow and continue to earn revenue. One commonly used profitability ratio is return on sales. Business owners use the return on sales ratio to examine the portion of each sales dollar that represents profit. To calculate this ratio, divide net income by sales. For example, the return on sales for Roadrunner Delivery Service is calculated as follows: $1,150 net income $2,650 sales



0.434 or 43.4%

Calculating Ratios

When calculating ratios, be sure to use the correct figures for the divisor and the dividend. For example, to calculate the ratio of net income to sales: • the net income amount is the dividend, • and the sales amount is the divisor.

This percentage indicates that each dollar of sales produced 43.4 cents of profit for Roadrunner. It can be compared to other accounting periods, to determine whether it is increasing or decreasing. For example, if net income next year is $2,750 and sales are $5,000, the return on sales would be computed as follows: $2,750 net income $5,000 sales



0.550 or 55.0%

As you can see, profit per sales dollar would increase by 11.6 cents.

Liquidity Measures Liquidity refers to the ease with which an asset can be converted to cash. Current assets are those used up or converted to cash during the normal operating cycle of the business. These might include Accounts Receivable, Cash in Bank, and Supplies. Current liabilities are debts of the business that must be paid within the next accounting period. Accounts Payable is an example of a current liability. The amount by which current assets exceed current liabilities is known as working capital . Because current liabilities are usually paid out of current assets, working capital represents the excess assets available to continue operations. The working capital for Roadrunner is calculated as follows: Current Assets  Current Liabilities  Working Capital $22,575  $11,725  $10,850

Section 3 The Balance Sheet and the Statement of Cash Flows

218-247_CH09_868829.indd 235

235

4/6/06 5:44:37 PM

AS YOU

READ

It’s Not What It Seems Liquidity When you think of liquidity, you might think of water or other liquids that flow freely. In accounting, liquidity refers to how easily an asset can be converted to cash.

A liquidity ratio is a measure of the ability of a business to pay its current debts as they become due and to provide for an unexpected need for cash. Two common ratios that are used to determine liquidity follow. Current Ratio. The current ratio reflects the relationship between current assets and current liabilities. The current ratio is calculated by dividing the dollar amount of current assets by the dollar amount of current liabilities. The current ratio for Roadrunner based on the balance sheet in Figure 9–10 is: Current Assets Current Liabilities

 Current Ratio

$22,575 $11,725

 1.92 or 1.9:1

The current liabilities of a business must be paid within a year. These liabilities are paid from current assets. A ratio of 2:1 or higher is considered favorable by creditors. It indicates that a business is able to pay its debts and that a business has twice as many current assets as current liabilities. A low ratio may indicate that a company could have trouble paying its debts. Quick Ratio. A quick ratio is a measure of the relationship between short-term assets and current liabilities. Short-term liquid assets—those that can be quickly converted to cash—are cash and net receivables. The quick ratio is computed by dividing the total cash and receivables by total current liabilities. The quick ratio for Roadrunner based on the Balance Sheet in Figure 9–10 is: Cash and Receivables Current Liabilities

 Quick Ratio

$22,575 $11,725

 1.92:1

In some instances the current ratio and the quick ratio can be the same, as in the case in this example. A quick ratio of 1:1 is considered adequate. This indicates that a business can pay its current debts with cash from incoming receivables. If a business has a quick ratio of 1:1 or higher, the business has $1.00 in liquid assets for each $1.00 of current liabilities. Quick ratios may also be compared from one year to the next. For example, suppose that cash and receivables for the previous year were $48,653 and current liabilities were $53,245. That year’s quick ratio would be computed as: $48,653 $53,245

 0.91:1

As you can see, Roadrunner has improved its liquidity position in the current year. The $1.92 in liquid assets per $1.00 in current liabilities (current year) is stronger than $0.91 in liquid assets per $1.00 in current liabilities (previous year). 236

Chapter 9 Financial Statements for a Sole Proprietorship

218-247_CH09_868829.indd 236

4/6/06 5:44:39 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Using a diagram like this one, summarize the steps for creating a balance sheet. Add answer boxes for steps as needed.

#REATINGA"ALANCE3HEET

Do the Math Compute the four amounts that are missing from the balance sheet below. On a separate sheet of paper, write the description and the dollar value of the four missing amounts. Interactive Communication Balance Sheet December 31, 20-Assets Cash in Bank Accounts Receivable—Chamber of Commerce Office Equipment Computer Equipment Total Assets Liabilities Accounts Payable—Tip Top Advertising Interest Payable Salaries Payable Total Liabilities Owner’s Equity Chuck Thompson, Capital Total Liabilities and Owner’s Equity

944 0 0 0 00 200 0 0 0 00 ? 1,000 0 0 0 00 2,994 0 0 0 00 275 5 0 0 00 ? 2 1 0 0 00 ? 2,715 1 0 0 00 ?

Problem 9–3 Calculating Return on Sales The Gawle Company is a family-owned and operated appliance rental and repair business. The income statement for the month ended August 31 includes the following: Rental Revenue Repair Revenue Advertising Expense Maintenance Expense

$3,256 2,140 575 1,130

Rent Expense Utilities Expense Net Income

$2,100 483 1,108

Instructions Calculate the return on sales for the month for The Gawle Company. Section 3 The Balance Sheet and the Statement of Cash Flows

218-247_CH09_868829.indd 237

237

8/29/05 1:14:20 PM

Summary

CH A P T ER 9 Key Concepts

1. The income statement reports revenue earned and the expenses incurred for a specific period of time. It also reports the net income or net loss for the period. 2. Sections of the income statement: Section

Information Presented

Heading

• Name of the business • Name of the report • Accounting period covered

Revenue

Balance of each revenue account for the period. The information comes from the Income Statement section of the work sheet.

Expenses

Balance of each expense account for the period. The information comes from the Income Statement section of the work sheet.

Net income

Total expenses subtracted from total revenue. The result is net income or net loss.

3. The statement of changes in owner’s equity summarizes the impact that the period’s business transactions had on the capital account. 4. Sections of the statement of changes in owner’s equity: Section

Information Presented

Heading

• Name of the business • Name of the report • Accounting period covered

Beginning Capital

The information comes from the owner’s capital account in the general ledger.

Increases in Capital

• Investments by Owner • Net Income Information about investments by the owner comes from the owner’s capital account in the general ledger. Information about net income comes from the income statement.

Decreases in Capital

• Withdrawals by Owner • Net Loss Information about withdrawals by the owner comes from the work sheet. Information about net loss comes from the income statement.

Ending Capital

238

Beginning Capital  Increases
Decreases

Chapter 9 Summary

218-247_CH09_868829.indd 238

8/29/05 1:14:30 PM

Summary

CHAPT E R 9

5. The balance sheet reports the balances in the permanent accounts at the end of the period. It states the financial position of a business on a specific date. Information comes from the Balance Sheet section of the work sheet and the statement of changes in owner’s equity. 6. Sections of the Balance Sheet: Section Heading

Information Presented • Name of the business • Name of the report • Date of the last day of the accounting period

Assets

Balance of each asset account. The information comes from the Balance Sheet section of the work sheet.

Liabilities

Balance of each liability account. The information comes from the Balance Sheet section of the work sheet.

Owner’s Equity

The balance of the owner’s capital account. The information comes from the statement of changes in owner’s equity.

7. The statement of cash flows reports how much cash the business took in and paid out during the period and why the Cash in Bank account increased or decreased. 8. Ratio analysis evaluates the relationship between various financial statement amounts. Profitability ratio

Earnings performance during the accounting period

Return on sales

Determines the percent of each sales dollar that is profit: Return on Sales  Net Income / Sales

Liquidity ratio

Ease with which an asset can be converted to cash

Current ratio

Quick ratio

Current Assets Current Liabilities Cash and Receivables Current Liabilities

Key Terms balance sheet

(p. 231)

liquidity ratio

(p. 236)

current assets

(p. 235)

profitability ratio

(p. 235)

current liabilities

(p. 235)

quick ratio

(p. 236)

current ratio

(p. 236)

ratio analysis

(p. 235)

financial statements (p. 220)

report form

(p. 232)

income statement

return on sales

(p. 235)

(p. 221)

statement of cash flows

(p. 234)

statement of changes in owner’s equity (p. 225) working capital

(p. 235)

Chapter 9 Summary

218-247_CH09_868829.indd 239

239

8/29/05 1:14:33 PM

C H A P T ER 9 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

8.

Income Statement a. What is the purpose of the income statement? b. What is the source of information used to prepare the income statement? Preparing an Income Statement a. List the sections of the income statement. b. How is net income or net loss calculated? Statement of Changes in Owner’s Equity a. What is the purpose of the statement of changes in owner’s equity? b. What sources of information are used to prepare the statement of changes in owner’s equity? Preparing a Statement of Changes in Owner’s Equity a. In a statement of changes in owner’s equity, what items are totaled in the “Add” section? b. What items are subtracted from the subtotal? Balance Sheet a. What is the purpose of the balance sheet? b. How does the date in a balance sheet heading differ from the other financial statements? Preparing a Balance Sheet a. What sources of information are used to prepare the balance sheet? b. How are balance sheet account names shown using the report form? Statement of Cash Flows a. What is the purpose of the statement of cash flows? b. Why does management need the information in the statement of cash flows? Ratio Analysis a. What is the purpose of computing ratios from amounts on financial statements? b. Who might be interested in the profitability ratio of a business?

Apply Key Terms As a game store owner, you want to develop an information sheet for the store manager. Explain the importance of financial statement preparation using these key terms. balance sheet current assets current liabilities current ratio financial statements income statement liquidity ratio profitability ratio

240

quick ratio ratio analysis report form return on sales statement of cash flows statement of changes in owner’s equity working capital

Chapter 9 Review and Activities

218-247_CH09_868829.indd 240

4/6/06 5:44:51 PM

Computerized Accounting

CHAPT E R 9

Preparing Financial Statements Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Preparing an income statement

• Transfer all revenue and expense accounts and their balances from the work sheet. • Subtract expenses from revenue to determine net income or net loss.

• From the Reports menu, select Income Statement or Profit and Loss, depending on the accounting software. • Click Print.

Preparing a statement of changes in owner’s equity

• Transfer the beginning balance of the capital account from the work sheet. • Add additional investments and net income or loss. • Subtract withdrawals. • Calculate the ending balance for the capital account.

• Since the software automatically computes the ending balance of the capital account for you, it is not necessary to prepare this statement.

Preparing a balance sheet

• Transfer permanent accounts and their balances from the work sheet. • Transfer the ending capital account balance from the statement of changes in owner’s equity. • Total all asset account balances. • Total all liabilities and owner’s equity account balances. • Verify that assets equal liabilities and owner’s equity.

• From the Reports menu, select Balance Sheet. • Click Print.

Q&A Peachtree Question How do I prepare financial statements in Peachtree?

Answer 1. From the Reports menu, select Financial Statements. 2. Choose the statement you wish to print from the Reports list. 3. Click Print when the statement appears on the screen.

QuickBooks Q & A QuickBooks Question How do I prepare financial statements in QuickBooks?

Answer 1. From the Reports menu, select Company & Financial. 2. Choose the report you wish to print from the list. 3. Click Print.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 9 Computerized Accounting

218-247_CH09_868829.indd 241

241

8/29/05 1:14:50 PM

Problems

C H A P T ER 9 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problems 9–4, 9–5 1. Select the problem set for Wilderness Rentals (Prob. 9–4, 9–5). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance, Income Statement, Statement of Changes in Owner’s Equity, and Balance Sheet. 4. Complete the Analyze activity. 5. End the session.

SMART GUIDE Step–by–Step Instructions: Problem 9–6 1. Select the problem set for Hot Suds Car Wash (Prob. 9–6). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance, Income Statement, Statement of Changes in Owner’s Equity, and Balance Sheet. 4. Complete the Analyze activity. 5. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 9–6 1. Restore the Problem 9-6.QBB file. 2. Print a Trial Balance, Profit & Loss report, and Balance Sheet. 3. Complete the Analyze activity. 4. Back up your work.

242

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 9–4 Preparing an Income Statement The work sheet for Wilderness Rentals for the month ended September 30, 20-- is in your working papers.

Instructions Using the work sheet, prepare an income statement for Wilderness Rentals.

Analyze

Compute the return on sales for the period.

Problem 9–5 Preparing a Statement of Changes in Owner’s Equity Instructions Using the work sheet for Wilderness Rentals in your working papers and the income statement prepared in Problem 9–4, prepare a statement of changes in owner’s equity and a balance sheet. Ronald Hicks made an additional investment in the business of $500 during the period.

Analyze

Compute the current ratio for Wilderness Rentals as of September 30.

Problem 9–6 Preparing Financial Statements The trial balance for the Hot Suds Car Wash is listed below and in your working papers.

Instructions 1. Complete the work sheet in your working papers. 2. Prepare an income statement for the quarter ended September 30, 20--. 3. Prepare a statement of changes in owner’s equity. Regina Delgado made no additional investments during the period. 4. Prepare a balance sheet in report form.

Analyze

Hot Suds Car Wash Trial Balance For the Quarter Ended September 30, 20-Debit 101 105 110 115 120 125 130 135 201 205 301 305 310 401 405 410 501 505 510 520 530

Cash in Bank Accts. Rec.—Linda Brown Accts. Rec.—Valley Auto Detailing Supplies Detergent Supplies Office Equipment Office Furniture Car Wash Equipment Accts. Pay.—Allen Vacuum Systems Accts. Pay.—O’Brian’s Office Supply Regina Delgado, Capital Regina Delgado, Withdrawals Income Summary Wash Revenue Wax Revenue Interior Detailing Revenue Advertising Expense Equipment Rental Expense Maintenance Expense Rent Expense Utilities Expense

8 457 584 619 810 460 15 2 4 0 2 160 7 522

Credit 00 00 00 00 00 00 00 00 3 5 2 8 00 1 2 1 5 00 23 8 4 5 00

1 5 0 0 00 9 6 2 3 00 8 0 1 9 00 2 6 2 8 00 1 4 1 3

963 137 186 500 720 48 8 5 8

00 00 00 00 00 00

48 8 5 8 00

Calculate the return on sales for the period.

Chapter 9 Problems

218-247_CH09_868829.indd 242

8/29/05 1:14:55 PM

Problems Problem 9–7 Preparing Financial Statements The general ledger accounts and balances for Kits & Pups Grooming follow. General Ledger 101 Cash in Bank 105 Accts. Rec.—Juan Alvarez 110 Accts. Rec.—Nathan Carlsbad 115 Accts. Rec.—Martha Giles 120 Grooming Supplies 125 Office Equipment 130 Office Furniture 135 Computer Equipment 140 Grooming Equipment 145 Kennel Equipment 201 Accts. Pay.—Able Store Equipment 205 Accts. Pay.—Dogs & Cats Inc. 207 Accts. Pay.—Pet Gourmet 301 Abe Shultz, Capital 305 Abe Shultz, Withdrawals 310 Income Summary 401 Boarding Revenue 405 Grooming Revenue 501 Advertising Expense 505 Equipment Repair Expense 510 Maintenance Expense 520 Rent Expense 530 Utilities Expense

$ 4,296 1,528 904 1,219 1,368 8,467 3,396 2,730 1,974 7,412 3,876 2,746 1,281 30,928 1,900 — 11,989 4,420 3,934 943 2,483 8,850 3,836

Instructions 1. Prepare a work sheet for the month ended September 30, 20--. 2. Prepare an income statement for the period. 3. Prepare a statement of changes in owner’s equity. Abe Shultz made an additional investment of $2,500 during the period. 4. Prepare a balance sheet in report form.

Analyze

CHALLENGE PROBLEM

CHAPT E R 9 SMART GUIDE Step–by–Step Instructions: Problem 9–7 1. Select the problem set for Kits & Pups Grooming (Prob. 9–7). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance, Income Statement, Statement of Changes in Owner’s Equity, and Balance Sheet. 4. Complete the Analyze activity. 5. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 9–7 1. Restore the Problem 9-7.QBB file. 2. Print a Trial Balance, Profit & Loss report, and Balance Sheet. 3. Complete the Analyze activity. 4. Back up your work.

Compute the quick ratio as of September 30.

Problem 9–8 Preparing a Statement of Changes in Owner’s Equity

Instructions Use the balance sheet and income statement shown to prepare a statement of changes in owner’s equity. (The owner made an additional investment of $4,000 and withdrew $1,500 during the period.)

CONTINUE

Chapter 9 Problems

218-247_CH09_868829.indd 243

243

8/29/05 1:15:01 PM

Problems

C H A P T ER 9

Outback Guide Service Income Statement For the Month Ended September 30, 20--

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 9–8 1. Select the spreadsheet template for Problem 9–8. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Revenue: Guide Service Revenue Expenses: Advertising Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense Total Expenses Net Income

375 138 1 250 1 500 1 161

00 00 00 00 00 4 4 2 4 00 4 4 8 9 00

Outback Guide Service Balance Sheet September 30, 20-Assets Cash in Bank Accounts Receivable—Mary Johnson Accounts Receivable—Feldman, Jones & Ritter Accounts Receivable—Podaski Systems Inc. Hiking Supplies Office Supplies Office Equipment Office Furniture Computer Equipment Hiking Equipment Rafting Equipment Total Assets Liabilities Accounts Payable—A-1 Adventure Warehouse Accounts Payable—Peak Equipment Inc. Accounts Payable—Premier Processors Total Liabilities Owner’s Equity Juanita Ortega, Capital Total Liabilities and Owner’s Equity

Analyze

244

8 9 1 3 00

3117 423 443 1008 153 338 6492 3084 3624 1015 9186

00 00 00 00 00 00 00 00 00 00 00 28 8 8 3 00

6 5 4 5 00 1 3 2 5 00 6 4 2 00 8 5 1 2 00 20 3 7 1 00 28 8 8 3 00

Identify the largest expense for this business during the period.

Chapter 9 Problems

218-247_CH09_868829.indd 244

8/29/05 1:15:03 PM

Winning Competitive Events

CHAPTER 9

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. The balance sheet shows how a business is doing a. for a period of 12 months. b. on a specific date during the year. c. regarding its profit or loss. d. All of the above 2. Financial statements are prepared in the following order: a. income statement, balance sheet, owners’ equity. b. income statement, statement of owners’ equity, balance sheet. c. statement of owners’ equity, balance sheet, income statement. d. balance sheet, income statement, statement of owners’ equity. 3. The purpose of the Income Statement is to report a. all assets, liabilities, and owner’s equity at a specified time. b. all the accounts used in journalizing a business’s transactions. c. balances in the capital accounts in order to determine the net income or loss. d. the net income or loss for a fiscal period.

Business Professionals of America MULTIPLE CHOICE 4. At the end of a fiscal period when a balance sheet is prepared, from which document may we find the ending owner’s capital balance? a. Worksheet c. Trial Balance b. Income Statement d. Statement of Changes in Owner’s Equity 5. During the month of February, Tom had the following transactions involving revenue and expenses: Paid $75 phone bill Provided services to clients for $1,200 cash Paid salaries of $650 to employees Paid $125 for computer maintenance Provided services on account totaling $2,000 Need More Help? What was Tom’s net income or net loss for the period? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning a. Net Income $350 Competitive Events and select Chapter 9. b. Net Loss $1,650 • Practice Questions and Test-Taking Tips c. Net Income $2,350 • Concept Capsules and Terminology d. Net Income $3,200 glencoeaccounting.glencoe.com

218-247_CH09_868829.indd 245

Chapter 9 Winning Competitive Events

245

10/13/05 10:08:43 PM

C H A P T ER 9 Critical Thinking

Financial Statements

CASE

STUDY

Service Business: Video Arcade

ETHICS

Financial Report or Repair?

a mattoefr

))

$ )) Communicating ACCOUNTING

246

Real-World Applications and Connections

1. Name the one piece of information that is included on both the income statement and the statement of changes in owner’s equity. 2. Explain why the date line on the balance sheet is different from the one on the other statements. 3. The net income computed on the income statement is different from the amount computed on the work sheet. How do you resolve this problem? 4. Explain why the Withdrawals account is reported on the statement of changes in owner’s equity but is not reported on the income statement. 5. What items are needed to complete the first three financial statements? List office supplies, forms, and any information needed. 6. Assess the value of using the income statement, the statement of changes in owner’s equity, and the balance sheet for making business decisions. Taki Yamamoto owns a video arcade business called Arcadia. Taki has hired your accounting firm to record Arcadia’s financial information. Taki hands you a folder containing these documents: • Canceled checks with June dates: $800 for rent, $120 for electricity, $70 for telephone service, $180 for insurance, $250 for newspaper advertising, and $200 for a cleaning service. • Invoice dated June 16 for a used video game sold on account for $2,000. • Cash register tapes for June showing total cash sales of $5,890. INSTRUCTIONS 1. Using the preceding information, make a list of accounts needed to record the transactions indicated by the financial documents Taki has given you. 2. Prepare an income statement for Arcadia for the month of June. Your favorite uncle, who owns a restaurant, has asked you to help with his bookkeeping. He desperately needs a bank loan and wants you to prepare the financial statements. After going over his accounting records, you do not believe a bank will give him a loan; but you notice that by leaving out an expense or two, your uncle’s business could look more promising. After all, he does have some good ideas for improving the business. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Presenting the Balance Sheet Team up with a classmate and give a brief presentation of the purpose and use of a balance sheet. Create a sample balance sheet for your presentation.

Chapter 9 Real-World Applications and Connections

218-247_CH09_868829.indd 246

4/6/06 5:45:09 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 9

Using Computers to Process Information Being able to use computers and software is essential for most business tasks. ON THE JOB As the accounting clerk for Jewels and Treasures, you manually prepared the income statements in the past. This year you will use a spreadsheet program. INSTRUCTIONS Prepare a list of reasons why using a spreadsheet program is an improvement over manually preparing financial statements.

The Euro Financial statements are generally prepared in the currency of the country in which the business operates. Many European countries use a single currency, the euro. Nations in the European Union began using the euro in 2002. Individuals and businesses both benefit by having a single currency. Travelers can use one currency in multiple countries. Businesses have a more stable business environment due to the elimination of exchange rate fluctuations. INSTRUCTIONS Imagine that you own a business with locations in Italy and France. Describe how the adoption of the euro in both countries has changed your financial statement preparation.

Your Business Do you dream of having your own business? The experience of tracking your own finances can help you create the general ledger accounts for that business. PERSONAL FINANCE ACTIVITY Create an income statement for a typical high school student. List revenue and expense accounts, and identify expenses that some, but not all, students would have. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 9.

Return on Sales Business owners are especially interested in the return on sales (see page 235). This percentage shows how much of each revenue dollar becomes profit for the business. INSTRUCTIONS Use Roadrunner’s income stateFinancial Statements ment on page 222 to calculate its return on in Sports sales. (Use $1,100 as net income instead of Financial statements summarize $1,150.) If total sales are about equal from results for owners, managers, month to month but return on sales decreases and other interested parties. Visit each month, what does this say about the glencoeaccounting business? What suggestions can you offer to .glencoe.com and click on Student Center. Click on improve the return on sales? WebQuest and select Unit 2 to continue your Internet project.

glencoeaccounting.glencoe.com

218-247_CH09_868829.indd 247

Chapter 9 Real-World Applications and Connections

247

4/6/06 5:45:11 PM

CH A P T ER 10

Completing the Accounting Cycle for a Sole Proprietorship

What You’ll Learn 1.

Explain why it is necessary to update accounts through closing entries.

2.

Explain the purpose of the Income Summary account.

3.

Explain the relationship between the Income Summary account and the capital account.

BEFORE YOU

READ

Predict 1. 2. 3. 4.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business

4.

Analyze and journalize the closing entries.

LOOKING AT FISCAL YEAR-END ACTIVITIES

5.

Post the closing entries to the general ledger.

Radio Flyer

6.

Prepare a post-closing trial balance.

they enjoyed when they were young. A Radio Flyer wagon is

Define the accounting terms introduced in this chapter.

Chicago, crafted and sold the first wooden red wagons in 1917.

Why It’s Important

generations, just like the love of the toys it produces. Antonio’s

7.

▲

For accounting purposes the life of a business is divided into specific periods of time.

Many adults love to give children the same kinds of toys that kind of toy. Antonio Pasin, an Italian immigrant living in The company has been passed down through the grandson, Robert Pasin, is now the chief executive officer of Radio Flyer. He has taken the company in new directions by adding tricycles, scooters, and other riding toys. Radio Flyer’s revenue comes from selling classic wagons and newer toys. At the end of each accounting period, the company closes its accounts and analyzes the revenues and expenses.

What Do You Think? Why would Radio Flyer employees want to compare sales of different toys from one accounting period to another?

248

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 248

9/19/05 6:00:18 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Preparing financial statements can be a hectic time for the accounting staff of Radio Flyer. Professional accountants learn to manage stressful times using good organizational skills. Once the financial statements have been prepared, other tasks must be completed to close one accounting cycle and begin another. You will learn about these tasks to complete the accounting cycle in this chapter.

glencoeaccounting.glencoe.com

248-275_CH10_868829.indd 249

Personal Connection 1. In your workplace are there especially hectic times of the day or year? 2. How do you and your co-workers handle these busy times?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 10.

249

9/15/05 11:21:47 AM

SECTION 1

BEFORE YOU

READ

Main Idea

Closing entries transfer the temporary account balances to the owner’s capital account.

Read to Learn… ➤ the last two steps of the

accounting cycle. (p. 250) ➤ the purpose of closing

entries. (p. 250) ➤ the purpose of the

Income Summary account. (p. 253) ➤ how to journalize the closing entries. (p. 253)

Key Terms

closing entries Income Summary account compound entry

AS YOU

READ

Instant Recall Accounting Period By dividing the life of a business into time periods, decision makers can see patterns and make comparisons.

250

Preparing Closing Entries In Chapter 9 you learned how to prepare three financial statements: • • •

The income statement reports revenue, expenses, and net income or net loss for the accounting period. The statement of changes in owner’s equity summarizes the impact of the business transactions on the owner’s capital account. The balance sheet reports the financial position of the business at the end of the period.

Accountants for a company like Mattel prepare financial statements and then journalize and post the closing entries. They prepare a postclosing trial balance to verify that the accounting records still balance.

Completing the Accounting Cycle What Are the Last Two Steps of the Accounting Cycle? During the accounting period, the accountant records transactions involving revenue, expenses, and withdrawals in temporary accounts. At the end of the period, the accountant transfers the balances in the temporary accounts to the owner’s capital account to bring it up to date and to prepare the accounting records for the next period. Closing entries are journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account. After the closing entries have been journalized and posted, a trial balance is prepared to prove the equality of the general ledger after the closing process. The trial balance prepared after closing is called a postclosing trial balance. As you can see in Figure 10–1, the closing process and the post-closing trial balance complete the accounting cycle.

Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries What Is the Purpose of Closing Entries? Preparing financial records for the start of a new period is a little like keeping stats for a basketball team. For basketball stats, individual and team scores are recorded for every game, but each new game starts with a score of zero. Similarly, in keeping the stats or accounting for a business, entries are posted to the accounts during the accounting period (game), but the

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 250

9/15/05 11:22:19 AM

Analyze each transaction

Collect and verify source documents

ACCOUNT DEBIT

ACCOUNT DEBIT

2

MEMORANDUM

1 9 GENERAL JOURNAL

Prepare a post-closing trial balance

GENERAL JOURNAL

CREDIT

INVOICE RECEIPT

POST-CLOSING TRIAL BALANCE

Journalize each transaction

8

LEDGER

Journalize and post closing entries

3

CREDIT

7

Post to the ledger LEDGER

4

6

5 TRIAL BALANCE

WORK SHEET

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER’S EQUITY

BALANCE SHEET

Prepare a work sheet

Prepare a trial balance

Prepare financial statements

temporary accounts (Rent Expense, Maintenance Expense, Revenue, etc.) start each new accounting period (game) with zero balances. The income statement, you’ll remember, reports the net income or net loss for one accounting period. The statement is prepared from information recorded and accumulated in the revenue and expense accounts. At the end of the period, the accountant records entries to close, or reduce to zero, the revenue and expense accounts because their balances also apply to only one accounting period. These closing entries also transfer the net income or net loss for the period to the capital account. The closing process is shown in Figure 10–2 on page 252. • • • • •

Figure 10–1 The Accounting Cycle with Steps 8 and 9 Highlighted

Prior to the closing process, you know that net income or net loss is calculated on the work sheet. A The net income or net loss amount then appears on the income statement. B On the statement of changes in owner’s equity, the ending balance of the capital account includes net income or net loss. C The ending balance of the capital account then appears on the balance sheet. D At this point, however, the balance of the capital account in the general ledger does not equal the amount on the balance sheet because the closing entries need to be journalized and posted. E

CULTURAL Diversity Setting Deadlines

In international business be aware of cultural differences about time. Business is conducted at a faster pace in the United States than in some other cultures. Tight deadlines can cause problems overseas if workers resent being pressured to do things at a pace other than the one they are used to.

For example, the balance on the work sheet for Maria Sanchez, Capital is $25,400, but on the balance sheet, it is $26,050. These two amounts differ because the withdrawals and the net income have not been recorded in the capital account in the general ledger. The closing process updates accounts through closing entries and brings the balance of the general ledger capital account up to date. Section 1 Preparing Closing Entries

248-275_CH10_868829.indd 251

251

9/15/05 11:22:33 AM

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-TRIAL BALANCE

ACCT. NO.

16

ACCOUNT NAME

515 Utilities Expense

17

CREDIT

DEBIT

1 2 5 00 39 7 7 5 00 39 7 7 5 00

Net Income

18 19

INCOME STATEMENT

BALANCE SHEET

CREDIT

DEBIT

1 2 5 00 1 5 0 0 00 1 1 5 0 00 2 6 5 0 00

DEBIT

CREDIT 16

2 6 5 0 00 38 2 7 5 00 37 1 2 5 00 1 1 5 0 00 2 6 5 0 00 38 2 7 5 00 38 2 7 5 00

20

17 18

A

19 20

Roadrunner Delivery Service Income Statement For the Month Ended October 31, 20-Revenue: Delivery Revenue Expenses: Advertising Expense Maintenance Expense Rent Expense Utilities Expense Total Expenses

2 6 5 0 00 7 5 00 6 0 0 00 7 0 0 00 1 2 5 00 1 5 0 0 00

B

1 1 5 0 00

Net Income

Roadrunner Delivery Service Statement of Changes in Owner’s Equity For the Month Ended October 31, 20-Beginning Capital, October 1, 20-Add: Investments by Owner Net Income Total Increase in Capital Subtotal Less: Withdrawals by Owner Ending Capital, October 31, 20--

25 4 0 0 00 1 1 5 0 00

C 26 5 5 0 26 5 5 0 500 26 0 5 0

00 00 00 00

Roadrunner Delivery Service Balance Sheet October 31, 20-Assets Cash in Bank Accounts Receivable—City News Accounts Receivable—Green Company Computer Equipment Office Equipment Delivery Equipment Total Assets Liabilities Accounts Payable—Beacon Advertising Accounts Payable—North Shore Auto Total Liabilities Owner’s Equity Maria Sanchez, Capital Total Liabilities and Owner’s Equity

21 1 2 5 00 1 4 5 0 00 3 0 0 0 00 2 0 0 00 12 0 0 0 00 37 7 7 5 00 7 5 00 11 6 5 0 00 11 7 2 5 00 26 0 5 0 00 37 7 7 5 00

D

Roadrunner Delivery Service Work Sheet For the Month Ended October 31, 20-ACCT. NO.

9 10

TRIAL BALANCE ACCOUNT NAME

301 Maria Sanchez, Capital 302 Maria Sanchez, Withdrawals

DEBIT

CREDIT

E

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

25 4 0 0 00 5 0 0 00

CREDIT

25 4 0 0 00 5 0 0 00

9 10

Figure 10–2 The Closing Process 252

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 252

9/15/05 11:22:37 AM

The Income Summary Account What Is the Purpose of the Income Summary Account? Before the closing entries are journalized and posted, no single account in the general ledger shows all of the revenue and expenses for the period. This information is scattered among the individual revenue and expense accounts. There is, however, one general ledger account that, until this point, has not been used. That is the Income Summary account. The Income Summary account is used to accumulate and summarize the revenue and expenses for the period. This account serves as a simple income statement in the ledger. Expenses, which have debit balances, are transferred as debits to Income Summary. Revenues, which have credit balances, are transferred as credits to Income Summary. The balance of the account equals the net income or net loss for the fiscal period. Refer to the chart of accounts for Roadrunner Delivery Service on page 79. Notice that Income Summary is in the Owner’s Equity section of the general ledger. It is located there because of its relationship to the owner’s capital account. Remember that the revenue and expenses transferred to the Income Summary account actually represent increases and decreases to owner’s equity. The balance of Income Summary (the net income or net loss for the period) is transferred to the capital account at the end of the closing process. Like the withdrawals account, Income Summary is a temporary account. However, it is quite different from the other temporary accounts. • •

• •

AS YOU

READ

Key Point Income Summary The Income Summary account does not have a normal balance.

Income Summary is used only at the end of the accounting period to summarize the balances from the revenue and expense accounts. Income Summary does not have a normal balance, which means that it does not have an increase or a decrease side. As shown in the following T account, the debit and credit sides of the account are simply used to summarize the period’s revenue and expenses. The balance of the Income Summary account before and after the closing process is zero. The Income Summary account does not appear on any financial statement. Income Summary Debit

Credit

Expenses

Revenue Balance is net income

If Revenue
Expenses If Revenue  Expenses

Balance is net loss

Preparing Closing Entries How Do You Journalize Closing Entries? Four journal entries are prepared to close the temporary accounts for Roadrunner: 1. Transfer the balances of all revenue accounts to the credit side of the Income Summary account. Section 1 Preparing Closing Entries

248-275_CH10_868829.indd 253

253

9/15/05 11:22:37 AM

AS YOU

2. Transfer all expense account balances to the debit side of the Income Summary account. 3. Transfer the balance of the Income Summary account to the capital account (net income to the credit side; net loss to the debit side). 4. Transfer the balance of the withdrawals account to the debit side of the capital account.

READ

In Your Own Words Income Summary Describe how and why the Income Summary account is used.

Closing Revenue to Income Summary The first step in the closing procedure is to transfer the balance of the revenue account to Income Summary. The balance for the revenue account is found in the Income Statement section of the work sheet. (Refer to the work sheet in Figure 9–3 on page 222 when reading about closing entries.)

Closing Entry First Closing Entry—Close Revenue to Income Summary ANALYSIS

Identify Classify
/

1. Roadrunner has only one revenue account, Delivery Revenue. The accounts affected are Delivery Revenue and Income Summary. 2. Delivery Revenue is a revenue account. Income Summary is a temporary owner’s equity account. 3. The Delivery Revenue account balance is decreased by $2,650 to zero. That amount, $2,650, is transferred to the Income Summary account.

DEBIT-CREDIT RULE

4. Decreases in revenue accounts are recorded as debits. Debit Delivery Revenue for $2,650. 5. To transfer the revenue to the Income Summary account, credit Income Summary for $2,650.

T ACCOUNTS

6.

Debit  Closing 2,650

JOURNAL ENTRY

Income Summary

Delivery Revenue

7.

Debit

Credit  Balance 2,650

Closing 2,650

GENERAL JOURNAL DATE 1 2 3

DESCRIPTION

POST. REF.

20-Closing Entries Oct. 31 Delivery Revenue Income Summary

4

254

Credit

PAGE DEBIT

3

CREDIT 1

2 6 5 0 00

2

2 6 5 0 00

3 4

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 254

9/15/05 11:22:38 AM

To record closing entries in the general journal, follow these steps:

AS YOU

1. Enter Closing Entries in the center of the Description column. 2. Enter the date (the last day of the accounting period). 3. Enter the name(s) of the account(s) to be debited and the debit amount(s). 4. Enter the name of the account, Income Summary, to be credited and the amount to be credited.

READ

In Your Experience Closing In your personal life, what types of “closing” activities do you perform at the end of a time period?

Closing Expenses to Income Summary The second closing entry transfers the balances of the expense accounts to Income Summary. The balances of the expense accounts are found in the Income Statement section of the work sheet.

Closing Entry Second Closing Entry—Close Expenses to Income Summary ANALYSIS

Identify

Classify


/

1. The accounts affected by the second closing entry are Advertising Expense, Maintenance Expense, Rent Expense, Utilities Expense, and Income Summary. 2. Advertising Expense, Maintenance Expense, Rent Expense, and Utilities Expense are expense accounts. Income Summary is a temporary owner’s equity account. 3. The balances of the four expense accounts are decreased to zero; the total decrease is $1,500. The total amount, $1,500, is transferred to the Income Summary account.

DEBIT-CREDIT RULE

4. To transfer the expenses to the Income Summary account, debit Income Summary for $1,500. 5. Decreases in expense accounts are recorded as credits. Credit Advertising Expense, $75; Maintenance Expense, $600; Rent Expense, $700; Utilities Expense, $125.

T ACCOUNTS

6.

Advertising Expense

Income Summary Debit

Debit  Balance 75

Credit

Closing 1,500 Maintenance Expense Debit  Balance 600

Credit  Closing 75

Rent Expense

Credit  Closing 600

Debit  Balance 700

Credit  Closing 700

Utilities Expense Debit  Balance 125

Credit  Closing 125

Section 1 Preparing Closing Entries

248-275_CH10_868829.indd 255

255

9/15/05 11:22:39 AM

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

5 6 7 8 9

DESCRIPTION

POST. REF.

Oct. 31 Income Summary Advertising Expense Maintenance Expense Rent Expense Utilities Expense

3

PAGE DEBIT

CREDIT

1 5 0 0 00

5

7 5 00 6 0 0 00 7 0 0 00 1 2 5 00

10

6 7 8 9 10

It is not necessary to use a separate closing entry for each expense account. As you can see, Roadrunner’s entry has one debit and four credits. A journal entry with two or more debits or two or more credits is called a compound entry . A compound entry saves both space and posting time. For example, each of Roadrunner’s expense accounts could be closed to Income Summary separately. That, however, requires four entries and postings to the Income Summary account instead of one entry and posting.

Closing Income Summary to Capital The third closing entry transfers the balance of the Income Summary account to the capital account. As shown in the T account, after closing Roadrunner’s revenue and expense accounts, Income Summary has a credit balance of $1,150. A credit balance indicates net income for the period. It is the same amount that appears on the work sheet. Income Summary 2 Closing entry for expenses

1,500 1 Closing entry for revenue Balance

2,650 1,150

Closing Entry Third Closing Entry—Close Income Summary to Capital ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

256

1. The accounts Income Summary and Maria Sanchez, Capital are affected. 2. Income Summary is a temporary owner’s equity account. Maria Sanchez, Capital is an owner’s capital account. 3. The Income Summary account balance is reduced to zero by transferring $1,150, the net income amount, to the capital account. Maria Sanchez, Capital is increased by $1,150.

4. To reduce the Income Summary balance to zero, debit Income Summary for $1,150. 5. Net income is recorded as a credit to the owner’s capital account. Credit Maria Sanchez, Capital for $1,150.

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 256

9/15/05 11:22:40 AM

6.

T ACCOUNTS

Maria Sanchez, Capital

Income Summary

Credit  Balance 25,400 Closing 1,150

Debit 

Debit

Credit

Closing 1,150

Balance 1,150

7.

JOURNAL ENTRY

GENERAL JOURNAL DATE

11 12

POST. REF.

DESCRIPTION

Oct. 31 Income Summary Maria Sanchez, Capital

PAGE DEBIT

3

CREDIT

1 1 5 0 00

11

1 1 5 0 00

13

12 13

After the third closing entry has been posted, the Income Summary account appears in T-account form as follows. Income Summary 2 Closing entry for expenses

1,500 1 Closing entry for revenue

3 Closing balance to owner’s capital account

1,150

2,650

If a business has a net loss, Income Summary has a debit balance. In that case, the third closing entry debits the capital account and credits Income Summary for the amount of the net loss. Figure 10–3 shows this general journal entry.

GENERAL JOURNAL DATE 1 2

20-Oct.

3

DESCRIPTION

POST. REF.

Closing Entries 31 Maria Sanchez, Capital Income Summary

4

PAGE DEBIT

3

CREDIT 1

7 0 0 00

2

7 0 0 00

3 4

Figure 10–3 Closing Income Summary for the Amount of Net Loss

Closing Withdrawals to Capital The fourth and last closing entry transfers the balance of the withdrawals account to the capital account. As you recall, withdrawals decrease owner’s equity. The balance of the withdrawals account is transferred to the capital account to reflect the decrease in owner’s equity. The balance of the withdrawals account is found in the Balance Sheet section of the work sheet.

Section 1 Preparing Closing Entries

248-275_CH10_868829.indd 257

257

9/15/05 11:23:14 AM

Closing Entry Fourth Closing Entry—Close Withdrawals to Capital ANALYSIS

1. The accounts affected by the fourth closing entry are Maria Sanchez, Withdrawals and Maria Sanchez, Capital. 2. Maria Sanchez, Withdrawals is a temporary owner’s equity account. Maria Sanchez, Capital is an owner’s capital account. 3. Maria Sanchez, Withdrawals is decreased by $500. Maria Sanchez, Capital is decreased by $500.

Identify Classify
/

DEBIT-CREDIT RULE

4. Decreases in owner’s capital accounts are recorded as debits. Debit Maria Sanchez, Capital for $500. 5. Decreases in owner’s withdrawal accounts are recorded as credits. Credit Maria Sanchez, Withdrawals for $500.

T ACCOUNTS

6.

Maria Sanchez, Withdrawals

Maria Sanchez, Capital Debit  Closing 500

Credit  Balance 26,550

Credit  Closing 500

Debit  Balance 500

7.

JOURNAL ENTRY

GENERAL JOURNAL DATE

14 15

DESCRIPTION

POST. REF.

Oct. 31 Maria Sanchez, Capital Maria Sanchez, Withdrawals

3

PAGE DEBIT

CREDIT

5 0 0 00

14

5 0 0 00

15

Figure 10–4 summarizes the closing entries for Roadrunner. GENERAL JOURNAL DATE 1 2 3

20-Oct.

DESCRIPTION

POST. REF.

Closing Entries 31 Delivery Revenue Income Summary

PAGE DEBIT

3

CREDIT 1

2 6 5 0 00

2

2 6 5 0 00

4 5 6 7 8 9

4

31 Income Summary Advertising Expense Maintenance Expense Rent Expense Utilities Expense

1 5 0 0 00

5

75 600 700 125

00 00 00 00

10 11 12

Figure 10–4 Journalizing the Closing Entries 258

15

6 7 8 9 10

31 Income Summary Maria Sanchez, Capital

1 1 5 0 00

11

1 1 5 0 00

13 14

3

12 13

31 Maria Sanchez, Capital Maria Sanchez, Withdrawals

5 0 0 00

14

5 0 0 00

15

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 258

9/15/05 11:23:17 AM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a table like this one to describe the closing entries that are made at the end of each accounting period.

'ENERAL*OURNAL%NTRY$ESCRIPTION

!CCOUNT$EBITED

!CCOUNT#REDITED

Do the Math Using these general ledger account balances, calculate the net income or net loss for the period. Then calculate the increase or decrease in owner’s capital. Anna Zarian, Capital $25,000 Anna Zarian, Withdrawals 5,000 Accounting Fees Revenue 9,000 Advertising Expense 1,000 Miscellaneous Expense 2,000 Rent Expense 1,500 Utilities Expense 500

Problem 10–1 Preparing Closing Entries Instructions Prepare closing entries for the following in your working papers. 1. A closing entry must be made for the account Ticket Revenue, which has a balance of $6,000. 2. A business has three expense accounts: Gas and Oil Expense (balance, $700), Miscellaneous Expense (balance, $600), and Utilities Expense (balance, $1,800). The end of the fiscal year is June 30.

Problem 10–2 Analyzing a Source Document Instructions Using the source document: 1. Journalize the transaction in a general journal in your working papers. 2. Post the entry to the appropriate T accounts. 3. Assume it is the end of the accounting period. Record the closing entry for this account in the general journal. 4. Post the closing entry to the appropriate T accounts.

DEPARTMENT OF WATER & POWER 455 Main Street Sarasota, FL 34230

TO

ACCOUNT NO.: INVOICE NO.:

00384843848-339 32004

Gulfview Tropical Fish and Supplies 4524 West Palm Bay Avenue Sarasota, FL 34222 DATES FROM

TO

March 15, 20--

April 14, 20--

USAGE

RATE

AMOUNT DUE

1,000 kWh

$.129 per kWh

$129.00

Section 1 Preparing Closing Entries

248-275_CH10_868829.indd 259

259

9/15/05 11:23:28 AM

SECTION 2

BEFORE YOU

Posting Closing Entries and Preparing a Post-Closing Trial Balance In Section 1 you learned how to journalize the closing entries. In this section you will complete the accounting cycle.

READ

Completing the Eighth Step in the Accounting Cycle: Posting the Closing Entries to the General Ledger

Main Idea

After the closing entries are posted, a post-closing trial balance is prepared to verify that debits equal credits.

What Is Special About Posting the Closing Entries?

Read to Learn…

The next step in the closing process is to post the closing entries to the general ledger accounts. The posting procedure is the same as for any other general journal entry, with one exception. The words Closing Entries are written in the Description column of the general ledger account. The posting of the closing entries for Roadrunner is shown in Figure 10–5. Note that Closing Entries can be abbreviated as Clos. Ent.

➤ how to post the closing

entries to the general ledger. (p. 260) ➤ how to prepare a postclosing trial balance. (p. 262)

Key Terms

GENERAL JOURNAL

post-closing trial balance DATE 1 2 3

20-Oct.

DESCRIPTION

POST. REF.

3

PAGE DEBIT

Closing Entries 31 Delivery Revenue Income Summary

401 303

2 6 5 0 00

31 Income Summary Advertising Expense Maintenance Expense Rent Expense Utilities Expense

303 501 505 510 515

1 5 0 0 00

CREDIT 1 2

2 6 5 0 00

4 5 6 7 8 9

4 5

7 60 70 12

5 0 0 5

00 00 00 00

10 11 12

Figure 10–5 Closing Entries Posted to the General Ledger

260

15

6 7 8 9 10

31 Income Summary Maria Sanchez, Capital

303 301

1 1 5 0 00

31 Maria Sanchez, Capital Maria Sanchez, Withdrawals

301 302

5 0 0 00

11

1 1 5 0 00

13 14

3

12 13

16

14

5 0 0 00

15 16

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 260

4/6/06 5:46:25 PM

ACCOUNT Maria Sanchez, Capital DATE

20-Oct.

BALANCE

POST. REF.

DESCRIPTION

1 2 31 Clos. Ent. 31 Clos. Ent.

ACCOUNT NO. 301

DEBIT

G1 G1 G3 G3

CREDIT

DEBIT

25 0 0 0 00 4 0 0 00 1 1 5 0 00

25 0 0 0 25 4 0 0 26 5 5 0 26 0 5 0

5 0 0 00

ACCOUNT Maria Sanchez, Withdrawals DATE

DESCRIPTION

20-Oct. 31 31 Clos. Ent.

CREDIT

ACCOUNT NO. 302 BALANCE

POST. REF.

DEBIT

G1 G3

CREDIT

DEBIT

5 0 0 00

DESCRIPTION

20-Oct. 31 Clos. Ent. 31 Clos. Ent. 31 Clos. Ent.

CREDIT

5 0 0 00 5 0 0 00

ACCOUNT Income Summary DATE

ACCOUNT NO. 303 BALANCE

POST. REF.

DEBIT

G3 G3 G3

CREDIT

DEBIT

DESCRIPTION

20-Oct. 15 20 31 Clos. Ent.

CREDIT

2 6 5 0 00

2 6 5 0 00 1 1 5 0 00

1 5 0 0 00 1 1 5 0 00

ACCOUNT Delivery Revenue DATE

ACCOUNT NO. 401 BALANCE

POST. REF.

DEBIT

G1 G1 G3

CREDIT

DEBIT

DESCRIPTION

20-Oct. 18 31 Clos. Ent.

1 2 0 0 00 2 6 5 0 00

2 6 5 0 00

ACCOUNT NO. 501 BALANCE

POST. REF.

DEBIT

G1 G3

CREDIT

7 5 00

DESCRIPTION

20-Oct. 29 31 Clos. Ent.

DEBIT

CREDIT

7 5 00 7 5 00

ACCOUNT Maintenance Expense DATE

CREDIT

1 2 0 0 00 1 4 5 0 00

ACCOUNT Advertising Expense DATE

00 00 00 00

POST. REF.

G1 G3

ACCOUNT NO. 505 BALANCE DEBIT

CREDIT

6 0 0 00

DEBIT

CREDIT

6 0 0 00 6 0 0 00

Figure 10–5 Closing Entries Posted to the General Ledger (continued)

Section 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance

248-275_CH10_868829.indd 261

261

9/15/05 11:23:46 AM

ACCOUNT Rent Expense DATE

DESCRIPTION

20-Oct. 16 31 Clos. Ent.

ACCOUNT NO. 510 BALANCE

POST. REF.

DEBIT

G1 G3

CREDIT

7 0 0 00

DESCRIPTION

20-Oct. 28 31 Clos. Ent.

CREDIT

7 0 0 00 7 0 0 00

ACCOUNT Utilities Expense DATE

DEBIT

POST. REF.

G1 G3

ACCOUNT NO. 515 BALANCE DEBIT

CREDIT

1 2 5 00

DEBIT

CREDIT

1 2 5 00 1 2 5 00

Figure 10–5 Closing Entries Posted to the General Ledger (continued)

AS YOU

READ

Compare and Contrast Post-Closing Trial Balance How is the post-closing trial balance similar to the trial balance? How is it different?

The Ninth Step in the Accounting Cycle: Preparing a Post-Closing Trial Balance If We Already Have a Trial Balance, Why Do We Need a Post-Closing Trial Balance? The last step in the accounting cycle is to prepare a post-closing trial balance. The post-closing trial balance is prepared to make sure total debits equal total credits after the closing entries are posted. The post-closing trial balance for Roadrunner is shown in Figure 10–6. Notice that only accounts with balances are listed on the post-closing trial balance. After the closing process, only permanent accounts have balances. Temporary accounts have zero balances, so there is no need to list those accounts on the post-closing trial balance. Roadrunner Delivery Service Post-Closing Trial Balance October 31, 20-Cash in Bank Accounts Receivable—City News Computer Equipment Office Equipment Delivery Equipment Accounts Payable—Beacon Advertising Accounts Payable—North Shore Auto Maria Sanchez, Capital Total

21 1 2 5 1 450 3 000 200 12 0 0 0

00 00 00 00 00

37 7 7 5 00

75 11 6 5 0 26 0 5 0 37 7 7 5

00 00 00 00

Figure 10–6 Post-Closing Trial Balance

262

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

248-275_CH10_868829.indd 262

9/15/05 11:23:56 AM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table like this one to list the general ledger account classifications. In the column titled “Appears on PostClosing Trial Balance,” place an X next to each account that carries a balance into the next accounting period.

!CCOUNT4YPE

!PPEARSON0OST #LOSING4RIAL"ALANCE

!SSET ,IABILITY /WNERS#APITAL /WNERS7ITHDRAWALS 2EVENUE %XPENSES

Do the Math You work for a company with a large accounting department, and every accounting clerk has specific duties. Your co-worker responsible for preparing the post-closing trial balance is ill today. Your supervisor asked you to prepare the post-closing trial balance. Using your computer or lined paper, draft the post-closing trial balance using the following account balances: Cash, $27,800; Accounts Receivable, $33,000; Equipment, $81,000; Accounts Payable, $24,500; and Owner’s Capital, $117,300.

Problem 10–3 Determining Accounts Affected by Closing Entries The following list contains some of the accounts used by Living Well Health Spa. General Ledger Accts. Pay.—The Fitness Shop Accts. Rec.—Linda Brown Advertising Expense Cash in Bank Exercise Class Revenue

Exercise Equipment Income Summary Laundry Equipment Maintenance Expense Membership Fees Miscellaneous Expense Office Furniture

Rent Expense Repair Tools Ted Chapman, Capital Ted Chapman, Withdrawals Utilities Expense

Instructions Using the form in your working papers: 1. In the first column, indicate the financial statement where each account appears: balance sheet or income statement. 2. In the next column, indicate whether or not the account is affected by a closing entry. 3. In the last column, indicate whether or not the account appears on the post-closing trial balance. The first account is shown as an example.

Account Name Accts. Pay.—The Fitness Shop

Financial Statement

Is the account affected by a closing entry?

Does the account appear on the postclosing trial balance?

Balance Sheet

No

Yes

Section 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance

248-275_CH10_868829.indd 263

263

9/15/05 11:24:03 AM

Summary

CH A P T ER 10 Key Concepts

1. The eighth step in the accounting cycle is to journalize and post the closing entries: • Closing is the process of transferring the balances in the temporary accounts to the owner’s capital account. • The asset, liability, and owner’s capital accounts are never closed. 2. The Income Summary account has two purposes: • to accumulate the revenue and expenses for an accounting period, and • to summarize the revenue and expenses for an accounting period. 3. Income Summary is a temporary owner’s equity account used to record net income or net loss: • A credit balance (net income) in Income Summary increases capital. • A debit balance (net loss) decreases capital. • The Income Summary account does not have a normal balance. That is, it does not have an increase side or a decrease side. • The Income Summary account balance is zero before and after the closing process. • The Income Summary account does not appear on any financial statements. 4. Prepare four closing entries: a. Close the revenue account(s) to Income Summary. 1 2 3

20-Dec. 31 Revenue Account Income Summary

1

x x x xx

2

x x x xx

3

b. Close the expense accounts to Income Summary. 4 5 6 7

31 Income Summary Expense Account Expense Account Expense Account

x x x xx

4

x x x xx x x x xx x x x xx

5 6 7

c. Close Income Summary to the owner’s capital account. 8 9

31 Income Summary Owner’s Capital Account

x x x xx

8

x x x xx

9

d. Close the owner’s withdrawals account to the owner’s capital account. 12 13

264

31 Owner’s Capital Account Withdrawals Account

x x x xx

12

x x x xx

13

Chapter 10 Summary

248-275_CH10_868829.indd 264

9/15/05 11:24:07 AM

Summary

C HAPT E R 1 0

Income Summary Debit

Credit

Expenses

Revenue Balance is net income

If Revenue
Expenses Balance is net loss

If Revenue  Expenses

5. After the closing entries have been journalized, follow this procedure: • Post them to the general ledger. • For each posted entry, enter the words Closing Entry in the Description column of the general ledger account. 6. The ninth step in the accounting cycle is to prepare a post-closing trial balance. Only the permanent accounts are listed on the post-closing trial balance.

Roadrunner Delivery Service Post-Closing Trial Balance December 31, 20-Cash in Bank Accts. Rec.—City News Computer Equipment Office Equipment Delivery Equipment Accts. Pay.—Beacon Advertising Accts. Pay.—North Shore Auto Maria Sanchez, Capital Totals

21 1 2 5 1 450 3 000 200 12 0 0 0

00 00 00 00 00

75 11 6 5 0 26 0 5 0 37 7 7 5 00 37 7 7 5

00 00 00 00

Key Terms closing entries

(p. 250)

compound entry

(p. 256)

Income Summary account

(p. 253)

post-closing trial balance

(p. 262)

Chapter 10 Summary

248-275_CH10_868829.indd 265

265

9/15/05 11:24:14 AM

C H A P T ER 10 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Closing Entries a. Which accounts are considered temporary accounts? b. Why are temporary accounts closed at the end of the fiscal year? Income Summary Account a. What is the purpose of the Income Summary account? b. How does the Income Summary account differ from the other temporary accounts? Income Summary and Capital Accounts a. Explain the relationship between the Income Summary account and the capital account. b. Why doesn’t the Income Summary account have a normal balance? Analyzing and Journalizing Closing Entries a. What is the source of information for the closing entries? b. List the steps for journalizing the closing entries. Posting the Closing Entries a. Classify the Income Summary account (asset, liability, owner’s equity, revenue, or expense). b. How is the posting procedure for closing entries different from the posting procedure for other general journal entries? Post-Closing Trial Balance a. What is the purpose of the post-closing trial balance? b. Why does the post-closing trial balance have balances of only permanent accounts?

Apply Key Terms On a separate sheet of paper, write a brief definition for each of the following terms. closing entries compound entry Income Summary account post-closing trial balance

266

Chapter 10 Review and Activities

248-275_CH10_868829.indd 266

9/15/05 11:24:21 AM

Computerized Accounting

C HAPT E R 1 0

Closing the Accounting Period Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Closing Entries

• Using a general journal form, prepare closing entries for revenue, expense, income summary, and withdrawals accounts. Post the closing entries in the general ledger accounts.

• It is not necessary to journalize closing entries. Closing entries are performed by the computerized system.

Q&A Peachtree Question

Answer

What is the difference between changing the accounting period and closing the fiscal year in Peachtree?

• In Peachtree the accounting period refers to the period used to record transactions. At the end of an accounting period (usually at month-end), you should change to the next accounting period. For example, at March 31, you would select the next accounting period, April 1, 20-- through April 30, 20--. • The fiscal year should be closed only when you are sure that all entries have been recorded and all reports have been printed for the year.

How do I close the fiscal year?

1. Post and print all journal entries before closing the fiscal year. Closing the fiscal year cannot be reversed. 2. From the Tasks menu, select System. 3. Select Year-End Wizard. 4. You will be prompted to complete Year-End closing procedures.

QuickBooks Q & A QuickBooks Question

Answer

What is the difference between changing the accounting period and closing the fiscal year in QuickBooks?

• In QuickBooks the accounting period refers to the month used to record transactions. Changing the accounting period is as simple as entering the first day of the next month. The software does not require that you manually adjust accounting periods. • The fiscal year should be closed only when you are sure that all entries have been recorded and all reports have been printed for the year.

How do I close the fiscal year?

1. 2. 3. 4. 5.

Record all journal entries before closing the fiscal year. From the Edit menu, select Preferences. Choose the Accounting preference and click the Company Preferences tab. In the Date field, enter the closing date and click the Set Password button. Enter and confirm the password, and click OK.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 10 Computerized Accounting

248-275_CH10_868829.indd 267

267

9/15/05 11:25:02 AM

Problems

C H A P T ER 10 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 10–4 1. Select the problem set for Wilderness Rentals (Prob. 10–4). 2. Rename the company and set the system date. 3. Select System from the Tasks menu and then choose Year-End Wizard. 4. Complete the Analyze activity. 5. End the session.

TIP: Print the General Ledger or General Ledger Trial Balance report to find an account balance.

Manual Glencoe Spreadsheet Spreadshee OR Templates Working Papers

Problem 10–4 Preparing Closing Entries A portion of the work sheet for Wilderness Rentals for the period ended December 31 follows.

Instructions Using the information from the work sheet, prepare the journal entries to close the temporary accounts. 1. 2. 3. 4.

Record the closing entry for the revenue account. Record the closing entry for the expense accounts. Record the closing entry for the Income Summary account. Record the closing entry for the withdrawals account. Wilderness Rentals Work Sheet For the Period Ended December 31, 20--

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

INCOME STATEMENT

ACCT. NO.

ACCOUNT NAME

101 105 110 115 120 125 201 203 205 301 305 310 401 501 505 515 525

Cash in Bank Accts. Rec.—Helen Katz Accts. Rec.—Polk and Co. Office Supplies Office Equipment Camping Equipment Accts. Pay.—Adventure Equip. Inc. Accts. Pay.—Digital Tech Computers Accts. Pay.—Greg Mollaro Ronald Hicks, Capital Ronald Hicks, Withdrawals Income Summary Equipment Rental Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense

18 19

Net Income

20

DEBIT

CREDIT

BALANCE SHEET DEBIT

CREDIT

7 0 0 0 00 2 0 0 0 00 1 0 0 0 00 9 0 0 00 12 0 0 0 00 6 0 0 0 00

1 2 3 4 5 6

9 0 0 00 4 0 0 00 5 0 0 00 19 7 7 5 00 2 3 5 0 00

8 9 10 11 12

1 1 1 1 5 9 14

14 9 6 5 00 5 0 0 00 5 6 0 00 0 0 0 00 2 3 0 00 2 9 0 00 14 9 6 5 00 31 2 5 0 00 21 5 7 5 00 6 7 5 00 9 6 7 5 00 9 6 5 00 14 9 6 5 00 31 2 5 0 00 31 2 5 0 00

21

Analyze

7

13 14 15 16 17 18 19 20 21

Predict the balance of the capital account after the closing entries are posted.

Problem 10–5 Preparing a Post-Closing Trial Balance Instructions Use the accounts shown on the next two pages to prepare a Dec. 31 post-closing trial balance for Hot Suds Car Wash.

268

Chapter 10 Problems

248-275_CH10_868829.indd 268

9/15/05 11:25:06 AM

Problems Cash in Bank Debit  Balance 8,000

Credit 

Accounts Receivable— Valley Auto Debit  Balance 5,050

Credit 

Office Furniture Debit  Balance 9,000

Credit 

Accounts Payable— Allen Vacuum Systems Debit 

Credit  Balance 41,000

Regina Delgado, Capital Debit  Closing 1,500

Credit  35,925 Closing 16,000

Income Summary Debit

Credit

Closing 19,000 Closing 16,000

Closing 35,000

Wax Revenue Debit  Closing 8,000

Credit  Balance 8,000

Advertising Expense Debit  Balance 2,500

Credit  Closing 2,500

C HAPT E R 1 0

Accounts Receivable— Linda Brown Debit  Balance 875

Credit 

Office Equipment Debit  Balance 6,000

Credit 

Car Wash Equipment Debit  Balance 65,000

Credit 

Accounts Payable— O’Brian’s Office Supply Debit 

Credit  Closing 1,500

Wash Revenue Debit  Closing 15,000

Step–by–Step Instructions: Problem 10–5 1. Select the problem set for Hot Suds Car Wash (Prob. 10–5). 2. Rename the company and set the system date. 3. Print a post-closing Trial Balance. 4. Complete the Analyze activity. 5. End the session.

TIP: Print the General Ledger Trial Balance after you complete the closing process to generate a postclosing trial balance.

Credit  Balance 2,500

Regina Delgado, Withdrawals Debit  Balance 1,500

SMART GUIDE

Credit  Balance 15,000

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 10–5 1. Restore the Problem 10-5.QBB file. 2. Print a Post-Closing Trial Balance. 3. Complete the Analyze activity. 4. Back up your work.

Interior Detailing Revenue Debit  Closing 12,000

Credit  Balance 12,000

Equipment Rental Expense Debit  Balance 3,000

Credit  Closing 3,000

CONTINUE

Chapter 10 Problems

248-275_CH10_868829.indd 269

269

4/6/06 5:46:50 PM

Problems

C H A P T ER 10

Maintenance Expense Debit  Balance 5,000

-

Credit  Closing 5,000

Rent Expense Debit  Balance 5,000

Credit  Closing 5,000

Utilities Expense Debit  Balance 3,500

Analyze

Credit  Closing 3,500

Predict the balance of the temporary accounts after the closing entries are posted.

Problem 10–6 Journalizing Closing Entries SMART GUIDE Step–by–Step Instructions: Problem 10–6 1. Select the problem set for Kits & Pups Grooming (Prob. 10–6). 2. Rename the company and set the system date. 3. Close the current fiscal year. 4. Complete the Analyze activity. 5. End the session.

The following account names and balances appear on the work sheet for Kits & Pups Grooming for the month ended December 31. Kits & Pups Grooming Work Sheet For the Month Ended December 31, 20-INCOME STATEMENT

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

ACCOUNT NAME

Cash in Bank Accts. Rec.—Juan Alvarez Accts. Rec.—Nathan Carlsbad Accts. Rec.—Martha Giles Office Equipment Office Furniture Computer Equipment Grooming Equipment Kennel Equipment Accts. Pay.—Able Store Equip. Accts. Pay.—Dogs & Cats Inc. Accts. Pay.—Pet Gourmet Abe Shultz, Capital Abe Shultz, Withdrawals Income Summary Boarding Revenue Grooming Revenue Advertising Expense Equipment Repair Expense Maintenance Expense Rent Expense Utilities Expense

DEBIT

CREDIT

BALANCE SHEET DEBIT

CREDIT

9 3 0 0 00 3 0 0 0 00 10 0 0 0 00 5 0 0 0 00 8 0 0 0 00 10 0 0 0 00 9 000 00 15 000 00 21 000 00

1 2 3 4 5 6 7 8 9

5 000 00 1 500 00 15 000 00 52 700 00 7 0 0 0 00

10 11 12 13 14 15

20 0 0 0 00 8 0 0 0 00 7 0 0 00 1 2 0 0 00 5 0 0 00 1 7 0 0 00 8 0 0 00

16 17 18 19 20 21 22

Instructions Using this information, record the closing entries for Kits & Pups Grooming. Use general journal page 11.

Analyze

270

Calculate the change in the capital account for the period.

Chapter 10 Problems

248-275_CH10_868829.indd 270

9/15/05 11:25:11 AM

Problems

C HAPT E R 1 0

Problem 10–7 Posting Closing Entries and Preparing a Post-Closing Trial Balance

SMART GUIDE Step–by–Step Instructions: Problem 10–7

Period ending December 31 closing entries for Outback Guide Service are: GENERAL JOURNAL DATE 1 2

20-Dec.

3 4 5 6 7 8 9 10 11 12

DESCRIPTION

Closing Entries 31 Guide Service Revenue Income Summary 31 Income Summary Advertising Expense Maintenance Expense Rent Expense Utilities Expense 31 Income Summary Juanita Ortega, Capital 31 Juanita Ortega, Capital Juanita Ortega, Withdrawals

POST. REF.

PAGE DEBIT

1. Select the problem set for Outback Guide Service (Prob. 10–7). 2. Rename the company and set the system date. 3. Close the fiscal year. 4. Print a post-closing Trial Balance. 5. Complete the Analyze activity. 6. End the session.

1

CREDIT 1

16 3 0 0 00

2

16 3 0 0 00 10 0 0 0 00

3 4

3 1 4 1

000 100 000 900

00 00 00 00

6 3 0 0 00

5 6 7

SMART GUIDE

8 9

6 3 0 0 00 4 0 0 0 00

Step–by–Step Instructions: Problem 10–8

10 11

4 0 0 0 00

13

12 13

Instructions Using your working papers, post the closing entries to the appropriate general ledger accounts and prepare a post-closing trial balance.

Analyze

Calculate the balance of the capital account after closing.

Problem 10–8 Completing Period-End Activities The general ledger for Showbiz Video shows the following at December 31: General Ledger 101 Cash in Bank 12,000 105 Accts. Rec.—G. Cohen 3,000 110 Accts. Rec.—J. Coletti 900 113 Accts. Rec.—S. Flannery 1,800 115 Accts. Rec.—Spring Branch School District 1,500 130 Office Equipment 5,000 135 Office Furniture 8,000 140 Computer Equipment 10,000 145 Video Tapes 20,000 150 Video Equipment 9,000 201 Accts. Pay.—Broad Street Office Supply 400 205 Accts. Pay.— Computer Horizons 15,500

207 Accts. Pay.— New Media Suppliers 3,000 209 Accts. Pay.—Palace Films14,000 301 Greg Failla, Capital 33,775 305 Greg Failla, Withdrawals 4,000 310 Income Summary — 401 Video Rental Revenue 9,600 405 VCR Rental Revenue 3,500 501 Advertising Expense 1,600 505 Equipment Repair Expense 1,200 510 Maintenance Expense 400 520 Rent Expense 1,000 530 Utilities Expense 375

1. Select the problem set for Showbiz Video (Prob. 10–8). 2. Rename the company and set the system date. 3. Print a General Ledger Trial Balance. 4. Print an Income Statement, Balance Sheet, and Statement of Changes in Owner’s Equity. 5. Close the fiscal year. 6. Print a post-closing Trial Balance. 7. Complete the Analyze activity. 8. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 10–8 1. Restore the Problem 10-8.QBB file. 2. Print a Trial Balance, a Profit & Loss report, and a Balance Sheet. 3. Close the fiscal year and print a Trial Balance. 4. Complete the Analyze activity. 5. Back up your work.

CONTINUE Chapter 10 Problems

248-275_CH10_868829.indd 271

271

9/15/05 11:25:14 AM

Problems

C H A P T ER 10

Instructions Using the preceding account names and balances: 1. Prepare the six-column work sheet. The period covered is one month. 2. Prepare the financial statements. Greg Failla invested $10,000 during the month. 3. Record the closing entries on page 12 of the general journal. 4. Post the closing entries. 5. Prepare a post-closing trial balance.

Analyze SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 10–9 1. Select the spreadsheet template for Problem 10–9. 2. Enter your name and the date. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

CHALLENGE PROBLEM

Calculate the total amount of all the accounts receivable accounts on December 31.

Problem 10–9 Completing End-ofPeriod Activities

At the end of December, the general ledger for Job Connect showed the following account balances: General Ledger 101 Cash in Bank 6,000 105 Accts. Rec.— CompuRite Systems 1,000 110 Accts. Rec.— Marquez Manufact. 500 113 Accts. Rec.—Roaring Rivers Water Park 600 115 Accts. Rec.—M. Spencer 200 130 Office Equipment 7,000 135 Office Furniture 5,000 140 Computer Equipment 8,500 201 Accts. Pay.—Micro Solutions Inc. 2,800 205 Accts. Pay.—Vega Internet Services 1,600

207 Accts. Pay.—Wildwood Furniture Sales 2,000 301 Richard Tang, Capital 23,600 302 Richard Tang, Withdrawals 3,000 303 Income Summary — 401 Placement Fees Revenue 6,900 405 Technology Classes Revenue 2,400 501 Advertising Expense 3,000 505 Maintenance Expense 800 510 Miscellaneous Expense 800 520 Rent Expense 2,000 530 Utilities Expense 900

Instructions Using the preceding account names and balances: 1. 2. 3. 4. 5.

Prepare the six-column work sheet. The period covered is one month. Prepare the financial statements. Record the closing entries on page 28 of the general journal. Post the closing entries. Prepare a post-closing trial balance.

Analyze

272

Identify the largest expenditure for the period.

Chapter 10 Problems

248-275_CH10_868829.indd 272

4/6/06 5:46:54 PM

Winning Competitive Events

CHAPTER 10

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Which of the following accounts needs no closing entries? a. Capital b. Supplies Expense c. Fees Owed d. All of the above 2. After adjusting and closing entries have been posted, a a. balance sheet is prepared. b. trial balance is prepared. c. post-closing balance sheet is prepared. d. post-closing trial balance is prepared. 3. The Capital account balance minus the net loss minus the Drawing account balance equals a. net loss. b. total liabilities. c. the capital amount shown on a balance sheet. d. the capital amount shown on an income statement.

Business Professionals of America MULTIPLE CHOICE 4. Which of the following will not appear on a post-closing trial balance? a. Accounts Payable b. Sales c. Owner’s Capital d. Cash 5. At the end of the fiscal period, the income summary account shows a credit balance of $3,500. This income summary account balance will be closed out to which account? a. a debit to owner’s capital b. a credit to owner’s capital c. a debit to owner’s revenue d. a credit to owner’s withdrawals Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 10. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

248-275_CH10_868829.indd 273

Chapter 10 Winning Competitive Events

273

10/13/05 10:10:09 PM

C H A P T ER 10

Real-World Applications and Connections

Critical Thinking

Completing the Accounting Cycle

CASE

Service Business: Computer Consulting

STUDY

1. What is the last step of the accounting cycle? 2. Why are the temporary accounts closed to the owner’s capital account at the end of the accounting period? 3. Make the closing entries for (a) a $5,000 net income for the year ending December 31 and (b) a $4,000 net loss for the quarter ending June 30. 4. Compare and contrast the closing entry for an expense account and the closing entry for the withdrawals account. 5. What items do you need to journalize the closing entries? Include office supplies and forms as well as any information that will be needed. 6. What is the value of preparing a post-closing trial balance? You note after preparing financial statements for Computer Works and completing the closing entries below that the owner’s capital account balance is $34,400 in the general ledger but is $43,400 on the statement of changes in owner’s equity. The capital account balance was $38,900 at the beginning of the month. INSTRUCTIONS (1) Identify the mistakes in the closing entries and (2) calculate the correct capital account balance. Date Aug. 31 Aug. 31

Description Consulting Fee Revenue Income Summary Income Summary Advertising Expense

Debit 9,240 870

Aug. 31

Income Summary

a mattoefr

))

ETHICS

$ )) Communicating ACCOUNTING

274

9,240 300

Internet Access Expense Rent Expense Rex Moran, Capital

Credit

20 550 8,100 8,100

Computer Viruses Computer viruses “reproduce” themselves in computer programs, slowing the system or destroying data. A friend gives you a computer game with a harmless virus. To add some fun at work, you load the game onto the company’s network. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Explaining Cause and Effect Your boss left you a note questioning the decrease in his owner’s capital account. You see that his withdrawals were the cause. List some points to explain the situation. Pick a classmate to listen to your explanation, which should prove that you understand that the withdrawals account is closed to the capital account.

Chapter 10 Real-World Applications and Connections

248-275_CH10_868829.indd 274

9/15/05 11:25:26 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Working in a Team Imagine that you work in the accounting department for the multimedia division of MTV. The CD-ROM project manager wants to produce and sell a new CD-ROM with clips from the latest music videos. You and your co-workers have questions. INSTRUCTIONS Form a team of five students and list the questions you may have. Compile your questions and opinions about the product (from a financial perspective) into a one-page report and present it to the class.

The World Trade Organization The World Trade Organization (WTO) negotiates most trade agreements between nations. The organization is dedicated to resolving disputes, stimulating economic growth, and lowering trade barriers. It handles issues including tariffs, customs processes, professional services, e-commerce, and import licensing. INSTRUCTIONS List the issues the WTO is reviewing this month. Locate the Web site for the WTO and click on the ‘Events calendar’ link.

Your Checking Account Whether you are a business owner or a consumer, you will probably use a checking account. You are responsible for keeping track of your cash by recording deposits and withdrawals on the check stubs in the checkbook. PERSONAL FINANCE ACTIVITY Assume that you opened a checking account by depositing $200 at the beginning of the month. During the month you wrote three checks: 101 for $25, 102 for $50, and 103 for $75. When and where should you record each deposit and check? Calculate the checking account balance. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 10.

Calculating Return on Owner’s Equity One measure of business success is the return on owner’s equity (ROE): Net Income $3,600   11.25% Beginning Owner’s Equity  Withdrawals $34,500  $2,500 The resulting percentage shows the amount earned during the period on each dollar invested by the owner. INSTRUCTIONS Use Roadrunner’s income statement (page 222) and statement of changes in owner’s equity (page 226) to calculate October’s ROE. How does this return compare with a bank savings account that pays 2 percent interest per year?

glencoeaccounting.glencoe.com

248-275_CH10_868829.indd 275

C HAPT E R 1 0

Closing Entries The closing entries for professional sports teams are similar to those for other types of businesses. Go to glencoeaccounting .glencoe.com and click on Student Center. Click on WebQuest and select Unit 2 to continue your Internet project.

Chapter 10 Real-World Applications and Connections

275

9/15/05 11:25:37 AM

CH A P T ER 11

Cash Control and Banking Activities BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe the internal controls used to protect cash.

2.

Describe the forms needed to open and use a checking account.

1. 2. 3. 4.

3.

Record information on check stubs.

4.

Prepare a check.

5.

Prepare bank deposits.

6.

Reconcile a bank statement.

7.

Journalize and post entries relating to bank service charges.

8.

9.

Describe the uses of the electronic funds transfer system. Define the terms introduced in this chapter.

Why It’s Important ▲

Banking tasks are basic practices in business and in your personal life.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business CONTROLLING CASH

Jamba Juice Snacking at school does not have to be about greasy chips, candy bars, and sugary sodas. Across the nation schools are getting healthier about snacks. In many places students can now choose from smoothies like the Tropical Awakening or the Strawberry Nirvana—both popular drinks from Jamba Juice. Made with 100 percent fruit juices, Jamba smoothies provide three to six of the daily recommended servings of fruit. Founded in 1990, the company now operates more than 430 stores nationwide. You can imagine how important it is to control cash as customers buy smoothies, juice, and baked goods. Companies like Jamba Juice use cash registers and specific bank deposit procedures to be sure that cash is properly accounted for.

What Do You Think? What do you think is the most common problem that occurs in Jamba Juice stores in regard to cash?

276

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 276

9/15/05 11:32:41 AM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE You cash your paycheck, stuff the cash in your wallet or billfold, and before you know it, the cash is gone! It is easy to lose track of how you spend your money. Businesses also have to watch their money carefully. One way of safeguarding cash is to keep it in the bank and write checks to make payments. You will learn about a business checking account in this chapter.

glencoeaccounting.glencoe.com

276-303_CH11_868829.indd 277

Personal Connection 1. Do you handle cash, checks, or credit cards in your job? 2. What procedures help protect cash?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 11.

277

9/15/05 11:32:47 AM

SECTION 1

BEFORE YOU

READ

Main Idea

Internal controls are steps taken to protect assets and keep reliable records.

Read to Learn… ➤ how a business protects

cash. (p. 278) ➤ how to use a checking account. (p. 278)

Key Terms

internal controls external controls checking account check depositor signature card deposit slip endorsement blank endorsement special endorsement restrictive endorsement payee drawer drawee voiding a check AS YOU

READ

It’s Not What It Seems Cash is more than dollar bills. In accounting, cash also means checks and funds on deposit in a bank or credit union.

278

Banking Procedures In any business, cash (currency, coins, and checks) is used in daily transactions. An important part of accounting for a business, therefore, involves tracking the cash received and paid out. For example, Jamba Juice has established procedures for processing the cash received from the sale of drinks and other items. Jamba Juice also has a system of monitoring and controlling cash paid out for wages, utilities, supplies, and numerous other expenses.

Protecting Cash How Does a Business Protect Cash? It is important to protect cash from loss, waste, theft, forgery, and embezzlement. Cash is protected through internal controls and external controls. Internal controls refer to procedures within the business that are designed to protect cash and other assets and to keep reliable records. Internal controls for cash include: 1. Limiting the number of persons handling cash. 2. Separating accounting tasks involving cash. For example, one person handles cash receipts, another handles cash payments, and a different person keeps the accounting records showing the amounts received or paid. 3. Bonding (insuring) employees who handle cash or cash records. 4. Using a cash register and a safe. 5. Depositing cash receipts in the bank daily. 6. Making all cash payments by check. 7. Reconciling the bank statement. External controls are the measures and procedures provided outside the business to protect cash and other assets. For example, banks maintain controls to protect the funds their customers deposit. These controls include verifying the accuracy of signatures on checks and maintaining records of monetary transactions.

The Checking Account How Do You Maintain a Checking Account? A checking account allows a person or business to deposit cash in a bank and to write checks against the account balance. A check is a written order from a depositor telling the bank to pay a stated amount of cash to the person or business named on the check. A depositor is a person or business that has cash on deposit in a bank.

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 278

9/15/05 11:33:24 AM

Opening a Checking Account A checking account helps protect cash and proACCT. NO. ACCOUNT 303443 Roadrunner Delivery Service NAME vides a record of cash transactions. ✓ ACCT. TYPE: CKG. SAV. C.R. OTHER The Signature Card. To open a checking NO. SIGNATURES REQUIRED 1 SIGNATURE Maria Sanchez SOC. SEC. NO. OR TAXPAYER I.D. NO. account, a business owner fills out a signature card and deposits cash in the bank. A signature card con1 SIGNATURE tains the signature(s) of the person(s) authorized to write checks on the account. The bank keeps the sig2 SIGNATURE nature card on file so that it can be matched against THE INDIVIDUALS WHO HAVE SIGNED ABOVE ARE AUTHORIZED TO USE THIS ACCOUNT ACCORDING TO THE RULES AND REGULATIONS THAT APPLY TO IT AND ANY SPECIAL INSTRUCTIONS ON FILE WITH THE BANK. EACH PERSON WHO SIGNS ACKNOWLEDGES THAT THESE RULES AND REGULATIONS HAVE BEEN signed checks presented for payment. The use of a RECEIVED AND AGREES TO THEIR TERMS. EACH PERSON ALSO AUTHORIZES THE BANK TO REQUEST A CONSUMER REPORT FROM ANY CONSUMER REPORTING AGENCY. signature card protects both the account holder and the bank against checks with forged signatures. See FOR BANK USE Figure 11–1 for the signature card used to open the IDENTIFICATION CA State License PRESENTED checking account for Roadrunner Delivery Service. COMMENTS Sole Proprietorship—delivery service The Checkbook. When a depositor opens a ACCOUNT 155 Gateway Blvd., Sacramento, CA 94230 ADDRESS checking account, checks are printed for the deposHOME BUSINESS 443-9696 443-1692 PHONE PHONE itor’s use. Printed checks are packaged together in a ✓ NEW ACCOUNT CAPTION CHANGE NEW SIGNATURE ADDITIONAL SIGNATURE checkbook like the one shown in Figure 11–2. Each ✓BUSINESS INDIVIDUAL JOINT CORPORATE FIDUCIARY OTHER page has several detachable checks attached to check NCPS OPENED BY BRANCH GLC stubs, and both are numbered in sequence. Using DATE OPENED AMOUNT October 1, 20-OR CHANGED DEPOSITED $ 25,000.00 checks with preprinted numbers helps a business keep track of every check that it writes, an important internal control. Figure 11–1 Checking The ABA Number. In addition to having a preprinted check numAccount Signature Card ber, each check is printed with the account number and an American Bankers Association (ABA) number. The ABA number is the fractional number printed in the upper right corner of a check, just below the check number. The ABA number identifies the bank and speeds the hand sorting of checks. $ No. 101 No. 101 Look at the ABA number on the check in Figure 11–3 on page 20 $ 280. The number above the line and to the left of the hyphen represents the city or state where the bank is located. The number to the right of the hyphen indicates the specific bank. The number $ No. 102 No. 102 20 below the line is the code for the Federal Reserve district where $ the bank is located. The ABA number was developed to speed the sorting of checks $ No. 103 No. 103 by hand. An updated version of the ABA number is also printed 20 $ on the bottom of each check for electronic sorting. The ABA number, the account number, and the check number are printed at the bottom of the check in a special ink and typeface. These $ No. 104 No. 104 20 specially printed numbers are called MICR (magnetic ink character $ recognition) numbers. Can you identify the MICR numbers on the check in Figure 11–3?

Making Deposits

Figure 11–2 Checkbook

A business makes regular deposits to protect the currency, coins, and checks it receives. Most businesses make daily deposits. Deposits are accompanied by a deposit slip , a bank form listing the cash and checks to be deposited. The deposit slip, also called a deposit ticket,

Section 1 Banking Procedures

276-303_CH11_868829.indd 279

279

9/15/05 11:33:29 AM

Roadrunner Delivery Service

No. 101

155 Gateway Blvd. Sacramento, CA 94230

71-627 3222

20

DATE PAY TO THE ORDER OF

$ DOLLARS

❖American National Bank SACRAMENTO, CALIFORNIA

MEMO

Figure 11–3 Printed Check


322271627
303443 101

gives both the depositor and the bank a detailed record of the deposit. Most banks provide printed deposit slips with the depositor’s name, address, and account number. A deposit slip for Roadrunner Delivery Service is shown in Figure 11–4. To complete a deposit slip, follow these steps: 1. Write the date on the Date line. 2. On the Cash line, indicate the total amount of currency and coins. 3. List checks separately by their ABA numbers. Write only the number that appears above the line in the ABA number, including the hyphen. If there are many checks, list the checks by amount on a calculator tape and attach the tape to the deposit slip. On the first Checks line, write “See tape listing,” followed by the total amount of the checks. 4. Add the amounts, and write the total amount on the Total line.

❖American National Bank SACRAMENTO, CALIFORNIA

1

Date November 6

20 --

Checks and other items are received for deposit subject to the terms and conditions of this bank's collection agreement.

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

Figure 11– 4 Deposit Slip


322271627
303443

BE SURE EACH ITEM IS ENDORSED

The checks are arranged in the order listed on the deposit slip. The deposit slip and the cash and checks are handed to a bank teller. The teller verifies the deposit and gives the depositor a receipt. The deposit receipt is usually a machine-printed form, although it may be a copy of the deposit slip stamped and initialed by the teller. DOLLARS CASH

CENTS

48 69

2

300 00 250 00

3

598 69

4

CHECKS (List Singly) 1 2

5-2 53-116

3 4 5 6 7 8

TOTAL

Endorsing Checks. A check is a form of property. When a business receives a check, it acquires the right to that check. To deposit the check in a checking account, the depositor endorses the check to transfer ownership to the bank. An endorsement is an authorized signature written or stamped on the back of a check that transfers ownership of the check.

280

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 280

9/15/05 11:33:32 AM

A business can use three types of endorsements when transferring ownership of a check. The types of endorsements are shown in Figure 11–5: •

• •

A blank endorsement includes only the signature or stamp of the depositor. It transfers ownership of the check, but it does not indicate who the new owner is. This is not a safe endorsement because the check can be cashed by anyone who presents it for payment. A special endorsement transfers ownership of the check to a specific individual or business. A restrictive endorsement transfers ownership to a specific owner and then limits, or restricts, how a check may be handled even after ownership is transferred. To protect checks from being cashed by anyone else, Roadrunner uses a restrictive endorsement that reads “For Deposit Only.” Roadrunner stamps the endorsement on the back of each check as soon as it is received.

Recording Deposits. The check stubs in the checkbook are a record of the Cash in Bank account. That is, the completed stubs reflect all checking account transactions: payments, deposits, and bank service charges. To see how to record a deposit in the checkbook, refer to Figure 11–6 and follow these steps: 1. Enter the date of the deposit on the check stub for the next unused check. Use the Add deposits line. 2. Enter the total amount of the deposit on the same line in the Dollars and Cents (amount) columns. 3. Add the deposit amounts to the amount on the Balance brought forward line. Enter the result on the Total line. This total is the new checkbook balance.

Blank Endorsement PLEASE ENDORSE HERE

Rita Jain DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

Special Endorsement PLEASE ENDORSE HERE

Pay to the Order of Harold Kauffman Rita Jain DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

Restrictive Endorsement PLEASE ENDORSE HERE

FOR DEPOSIT ONLY Roadrunner Delivery Service ACCT. 303443 DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

Writing Checks

Figure 11–5 Endorsements

Writing a check is a simple procedure. You need to follow a few important rules, however, to ensure correct recordkeeping and proper handling of the money represented by the check. •

•

Write checks in ink, or prepare typewritten or computer-generated checks. Some businesses use a check-writing machine that perforates the amount of the check in words on the Dollars line. These perforations protect a check from alteration. Checks written in $ pencil are not acceptable because they can be easily altered. Date Complete the check stub before writing the check. This reduces To the chance of forgetting to complete the stub. For

Completing the Check Stub. Because the stub serves as a permanent record of the check, it must be complete and accurate. A check stub has two parts. The upper part summarizes the details of the cash payment transaction. The lower part is a record of how the transaction affects the checking account. To see how to complete the check stub, refer to Figure 11–7 on page 282 and follow these steps: 1. In the upper part of the stub, enter the amount of the check, the date, the name of the payee (on the To line), and the purpose of the check (on the For line). A payee is the person or business to which a check is written.

No. 103 20 --

Dollars Balance brought forward Add deposits

1

10/14 10/15

200 00

2

1,200 00 23,050 00

Total

3

Less this check Balance carried forward

Figure 11–6 Recording a Deposit in the Checkbook Section 1 Banking Procedures

276-303_CH11_868829.indd 281

Cents

21,650 00

281

4/6/06 5:49:49 PM

$

1

Date To For

2. If it has not already been done, enter the balance on the Total line on the lower part of the stub. 3. Enter the amount of the check on the Less this check line. This amount is the same as the amount shown on the first line in the upper part of the stub. 4. Subtract the check amount from the total. Enter the new balance on the Balance carried forward line. 5. Enter the new balance on the first line of the bottom part of the next check stub, the Balance brought forward line.

700.00 No. 103 October 16 20 -Tooley & Co. Management Rent Dollars

Balance brought forward Add deposits

Cents

21,650 00 200 00

10/14

1,200 00

10/15

2 3 4

23,050 00

Total

700 00

Less this check Balance carried forward

22,350 00

$

No. 104

Date

20

Filling Out the Check. To see how to write a check, refer to Figure 11–8 and follow these steps: 1. Write the date on which the check is being issued. 2. Write the payee’s name on the Pay To The Order Of line. Start the payee’s name as far left as possible. 3. Enter the amount of the check in numbers. Write clearly, and begin the first number as close to the printed dollar sign as possible. 4. On the next line, write the dollar amount of the check in words. Start at the left edge of the line. Write any cents as a fraction. For example, write 22 cents as 22/100. Draw a line from the cents fraction to the word Dollars. 5. Sign the check. Only an authorized person—one who has signed the signature card for the account—may sign the check. The person who signs a check is the drawer . The bank on which the check is written is the drawee .

To For Dollars Balance brought forward

Cents

5

22,350 00

Add deposits

Total Less this check Balance carried forward

Figure 11–7 Filling Out the Check Stub

The checkbook is now ready for the next transaction. Voiding a Check. If an error is made while writing a check, the check is marked “Void” in large letters across the front (in ink). This is known as voiding a check . A new check is then prepared. When a check is voided, the stub is also voided. Since a business needs to account for each check used, a voided check is never destroyed. Instead it is filed with the business records. A voided check may be placed in a special file, or it may simply be folded and stapled to the check stub. 3 2 1 $ Date To For

700.00 No. 103 October 16 20 -Tooley & Co. Management Rent

Roadrunner Delivery Service

103

155 Gateway Blvd. Sacramento, CA 94230

71-627 3222 DATE

Dollars Balance brought forward Add deposits

Cents

PAY TO THE ORDER OF

21,650 00

10/14

200 00

10/15

1,200 00

Less this check Balance carried forward

20 -$ 700.00

Seven hundred and no/100 ❖American National Bank

DOLLARS

SACRAMENTO, CALIFORNIA

23,050 00

Total

Tooley & Co. Management

Oct. 16

MEMO

700 00

Maria Sanchez


322271627
303443 103

22,350 00

4

5

Figure 11–8 Completed Stub and Check 282

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 282

9/15/05 11:33:34 AM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Create a chart like this one to list the activities involved in maintaining a checking account. Identify how each activity helps protect cash. Add more rows as needed.

!CTIVITY

(OW4HIS!CTIVITY0ROTECTS#ASH

Do the Math Assume you work for a health food store that prepares two deposits each day. Using the following cash register summaries, determine how much cash should be deposited after the first shift ended at 3:00 p.m. and after the second shift ended at 9:00 p.m. First Shift (9:00 a.m. – 3:00 p.m.)

Second Shift (3:00 p.m. – 9:00 p.m.)

Cash Register

Cash Register

1

2

3

1

2

3

Coins

35.40

29.35

18.75

24.62

19.21

14.32

Currency

395.00

425.00

300.00

218.00

349.00

216.00

Checks

900.00

875.00

725.00

725.00

645.00

829.00

Problem 11–1 Preparing a Deposit Slip and Writing Checks On August 14 Loretta Harper, owner of Peabody Cards and Gifts, deposited the following items in the checking account of the business. Cash: $784.29 Checks: Charles Ling, drawn on American Bank of Commerce, ABA No. 32-7091; $39.44 Keith Lopez, drawn on People’s Bank, ABA No. 84-268; $22.95 Marjorie Luke, drawn on Horizon Federal Savings and Loan, ABA No. 84-6249; $52.95 Mable Parker, drawn on Security National Bank, ABA No. 84-2242; $67.45 On August 15 Peabody received the July bill from Northeast Telephone for $214.80. On August 17 Peabody received an advertising bill from the Bayside News for $275.00.

Instructions Using the forms provided in your working papers: 1. Complete a deposit slip. 2. Record the deposit on the check stub for Check 41. 3. Record the information for paying the telephone bill on Check Stub 41 and complete the check stub. Use August 16 as the date. 4. Prepare Check 41 to pay the telephone bill and sign your name as drawer. 5. Prepare the check stub and Check 42 to pay the bill for advertising. Use August 17 as the date and sign your name as drawer. Section 1 Banking Procedures

276-303_CH11_868829.indd 283

283

9/15/05 11:33:36 AM

SECTION 2

BEFORE YOU

READ

Main Idea

The bank reconciliation is an important internal control.

Read to Learn…

➤ why businesses prove cash.

(p. 284) ➤ how to read and reconcile a bank statement. (p. 284) ➤ about electronic funds transfer. (p. 290)

Key Terms

bank statement canceled checks imaged checks reconciling the bank statement outstanding checks outstanding deposits bank service charge stop payment order NSF check Check 21 postdated check electronic funds transfer system (EFTS) bankcard automated teller machine (ATM) AS YOU

READ

Instant Recall Proving To prove something means to compare balances and make sure they are equal.

284

Reconciling the Bank Statement Have you ever been surprised to find that your bank account had less money than you thought because you forgot to record a withdrawal? If so, you realize the importance of reconciling (bringing into agreement) your checkbook with your bank statement. Business owners and their accountants also need to keep up-to-date records of cash.

Proving Cash What Is Meant by Proving Cash? The balance in the Cash in Bank account in the general ledger is regularly compared with the balance in the checkbook. If all cash receipts have been deposited, all cash payments have been made by check, and all transactions have been journalized and posted, the Cash in Bank account balance should agree with the checkbook balance. Comparing these two cash balances regularly is part of the internal control of cash. Some businesses prove cash daily or weekly, while others prove cash on a monthly basis. If the Cash in Bank balance does not agree with the checkbook balance, and the trial balance has been proved, the error is probably in the checkbook. The following checkbook errors are the most common: • • •

faulty addition or subtraction failure to record a deposit or a check a mistake in copying the balance forward amount to the next check stub

If an error is made in the checkbook, the proper place to enter the correction is on the next unused check stub. For example, suppose Check 22 for $84.60 was recorded on the check stub as $48.60. The error is found when cash is proved. By this time several other checks have been written, so the next unused check stub is 31. In this case the amount of the error ($84.60
$48.60  $36.00) is subtracted from the balance brought forward on Check Stub 31 (see Figure 11–9). A note is made on Check Stub 22 to indicate that the error is corrected on Check Stub 31.

The Bank Statement What Is a Bank Reconciliation? A bank statement is an itemized record of all transactions in a depositor’s account over a given period, usually a month. Typical bank statements include the following information:

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 284

9/15/05 11:33:38 AM

1. the checking account balance at the beginning of the period 2. a list of all deposits made by the business during the period 3. a list of all checks paid by the bank 4. a list of any other deductions from the depositor’s account 5. the checking account balance at the end of the period

No. 31 --

$

20

Date To For Dollars Balance brought forward

Cents

4,750 00

Find each of these items on the bank statement for Roadrunner 36 00 Less: Error corr. Ck. 22 Delivery Service in Figure 11–10. 4,714 00 Total With the bank statement, a bank may include the canceled Less this check checks that it paid and deducted from the depositor’s account. Balance carried forward Instead of the actual checks, banks are increasingly sending images of the checks or simply a list of them. These imaged checks or Figure 11–9 Entering substitute checks (copies of originals) or the list are used to verify the an Error Correction on the information on the bank statement. These checks and the bank statement Check Stub should be kept in a file or storage box in case they are needed later as proof of payment or for other reasons. Upon receipt, the bank statement is compared to the checkbook. The process of determining any differences between the bank statement and the checkbook is called reconciling the bank statement . It is also known as a bank reconciliation. The ending balance on the bank statement seldom agrees Add deposits

AS YOU

❖ American National Bank SACRAMENTO, CALIFORNIA

Roadrunner Delivery Service 155 Gateway Boulevard Sacramento, CA 94230

Account Number: 303443

FDIC

Statement Date: 10/31/20--

Balance Last Statement

1

Deposits & Other Credits

00.00 Description

Balance Forward Deposit Check 101 Deposit Check 102 Deposit Check 103 Check 104 Service Charge

Checks & Other Debits

No.

Amount

No.

Amount

3

26,400.00

5

4,183.00

Checks & Other Debits

Deposits & Other Credits

25,000.00 3,000.00

3

2

200.00

350.00 1,200.00 700.00 125.00 4 8.00

Balance This Statement

5

22,217.00

Date

Balance

10/01 10/04 10/14 10/15 10/16 10/20 10/31 10/31

00.00 25,000.00 22,000.00 22,200.00 21,850.00 23,050.00 22,350.00 22,225.00 22,217.00

READ

Compare and Contrast Cash Records What are the similarities and differences between check stubs and the Cash in Bank general ledger account?

PLEASE EXAMINE YOUR STATEMENT AT ONCE. IF NO ERROR IS REPORTED IN 10 DAYS THE ACCOUNT WILL BE CONSIDERED CORRECT AND VOUCHERS GENUINE. ALL ITEMS ARE CREDITED SUBJECT TO FINAL PAYMENT.

The Bank for All Your Business Needs

Figure 11–10 Bank Statement

Section 2 Reconciling the Bank Statement

276-303_CH11_868829.indd 285

285

4/6/06 5:49:56 PM

with the balance in the checkbook. There are three common reasons that the bank statement balance and the checkbook balance disagree: • • •

outstanding checks outstanding deposits bank charges

Outstanding Checks and Deposits In banking terms the word outstanding simply means “not yet received.” Outstanding checks , therefore, are checks that have been written but have not yet been presented to the bank for payment. It is not unusual for checks written in one statement period to reach the bank in a later period. Outstanding deposits are deposits that have been made and recorded in the checkbook but do not appear on the bank statement. A deposit made the same day the bank statement is prepared may not appear on the statement.

Bank Service Charges Date To For Dollars Balance brought forward

21,125

Add deposits

Less: Svc. Charge


8 21,117

Total Less this check Balance carried forward

Figure 11–11 Entering a Bank Service Charge on the Check Stub

Connect to…

ECONOMICS

In the early Middle Ages, Europe’s economy used the barter system. Goods and services were paid for with other goods and services. As trade spread throughout Europe, the long distances made barter unwieldy. The use of currency, banks, and credit was far more convenient.

286

The bank statement balance also reflects any service charges made by the bank during the statement period. Banks impose a bank service charge , which is a fee for maintaining bank records and processing bank statement items for the depositor. This charge Cents varies from bank to bank. It is frequently based on either the num00 ber of checks and deposits handled during the statement period or the balance in the depositor’s account. The bank subtracts the 00 service charge from the depositor’s account. The depositor usually 00 does not know about the service charge, or other bank charges handled in the same manner, until the statement is received. Before the bank statement is reconciled, the checkbook balance is adjusted by the amount of the bank service charge. As shown in Figure 11–11, the words Less: Service Charge are written on the next unused check stub on the line above the Total line. The amount of the service charge is entered in the amount column, preceded by a minus sign. The balance is recalculated and entered on the Total line.

No. 107 20 --

$

Interest Paid Some banks pay interest on funds in a checking account. This is not a common practice, and the account must maintain a minimum balance to qualify. The interest appears on the bank statement. The amount of interest must be recorded in the checkbook, journalized, and posted. The journal entry for interest paid follows: Debit Cash in Bank Credit Interest Income

The Bank Reconciliation Promptly reconciling the bank statement is a good way to ensure orderly cash records and guard against cash losses. The bank expects to be notified immediately of any errors on the statement. Failure to do so may release the bank from responsibility for the errors.

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 286

9/15/05 11:33:43 AM

On the back of the bank statement is a form for reconciling the bank statement. This form documents the differences between the bank balance and the checkbook balance. Refer to Figure 11–12 and follow these steps to reconcile a bank statement:

BANK RECONCILIATION FORM PLEASE EXAMINE YOUR STATEMENT AT ONCE. ANY DISCREPANCY SHOULD BE REPORTED TO THE BANK IMMEDIATELY. 1. Record any transactions appearing on this statement but not listed in your checkbook.

CHECKS OUTSTANDING Number

1

105 106

Amount

600 00 500 00

2. List any checks still outstanding in the space provided to the right. 3. Enter the balance shown on this statement here.

2

22,217 00

4. Enter deposits recorded in your 1. Arrange the 3 checkbook but not shown on this canceled checks in statement. numerical order. 5. Total lines 3 and 4 and enter here. 22,217 00 Compare the 6. Enter total checks outstanding here. canceled checks 4 1,100 00 7. Subtract line 6 from line 5. This with those listed adjusted bank balance should agree 5 on the statement with your checkbook balance. 21,117 00 and with the stubs. When you match a check and a stub, place a check mark beside the check amount on the bank statement and on the check stub. The stubs without check marks represent outstanding checks. List the outstanding check numbers and amounts on the bank reconciliation form. 2. Enter the ending balance shown on the bank statement. 3. Compare deposits listed on the bank statement to deposits listed in the checkbook. Enter the total of any outstanding deposits on the reconciliation form. Add this total to the bank statement balance and enter the result on the form. 4. Subtract the total of the outstanding checks from the amount calculated in Step 3. The result is the adjusted bank balance. 5. Compare the adjusted bank balance to the checkbook balance. When the balances match, the bank statement is reconciled.

TOTAL

1,100 00

Figure 11–12 Bank Reconciliation Using a Bank Statement Form

Figure 11–13 illustrates a two-column account form. If the adjusted bank balance does not match the Roadrunner Delivery Service Bank Reconciliation Statement checkbook balance, find and October 31, 20-correct the error. Notify the bank immediately if it is a Balance on bank statement 22 2 1 7 bank error. It is more likely, Additions: however, that the error is in Deposits in transit 22 2 1 7 the checkbook. Check the Deductions for outstanding checks: addition and subtraction on 6 0 0 00 Check 105 the check stubs and on the 5 0 0 00 Check 106 bank reconciliation form. 1 100 Total outstanding checks Also look for any outstand21 117 Adjusted bank balance ing checks or deposits that have not been included in Figure 11–13 Bank Account Reconciliation Using a Two-Column Account Form your calculations.

Section 2 Reconciling the Bank Statement

276-303_CH11_868829.indd 287

00

00

00 00

287

9/15/05 11:33:49 AM

Journalizing Bank Service Charges Like any other business, banks charge fees for their services. A bank service charge is an expense that is recorded in the accounting records. The bank deducted the service charge from Roadrunner’s account, so it is not necessary to write a check for this expense. The bank statement is the source document for recording the bank service charge.

B u s i n e s s Tr a n s a c t i o n On November 1 Roadrunner received the bank statement. A bank service charge of $8 appeared on the statement. ANALYSIS

1. Bank service charges are often recorded in the Miscellaneous Expense account. Therefore, Miscellaneous Expense and Cash in Bank are affected. 2. Miscellaneous Expense is an expense account. Cash in Bank is an asset account. 3. Miscellaneous Expense is increased by $8. Cash in Bank is decreased by $8.

Identify

Classify
/

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Miscellaneous Expense for $8. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $8.

T ACCOUNTS

6.

Debit  8

7.

JOURNAL ENTRY

Cash in Bank

Miscellaneous Expense Credit


Credit
8

Debit 

GENERAL JOURNAL DATE 1 2 3

20-Nov.

DESCRIPTION

POST. REF.

PAGE DEBIT

42

CREDIT 1

1 Miscellaneous Expense Cash in Bank

8 00

2

8 00

4

3 4

Special Banking Procedures Checks are usually written or received and deposited without any problems. However, three problems may occur: • • • 288

A business does not want the bank to pay a check that was issued. A business receives and deposits a check from a customer whose account does not have enough money to cover the check. A customer presents a check that has a date in the future.

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 288

9/15/05 11:33:52 AM

Stopping Payment on a Check. Occasionally, a drawer Check Stub for Stopped Check (Roadrunner) orders the drawee (bank) not to honor, or pay, a 500.00 No. 633 $ check. A stop payment order is a demand by the drawer, usually January 12 20 -Date Smith Engineering To in writing, that the bank not honor a specific check. A stop payElectrical Work For ment order is often used when a check is lost. The bank must receive Dollars Cents the stop payment order before the check is presented for payment. 12,723 00 Balance brought forward Otherwise, it is too late. Add deposits To record a stop payment order, the accountant writes the ED T P P words Stopped Payment on the check stub for the stopped check. N O ST YME The accountant then adds the amount of the stopped check on the Total A next unused check stub, illustrated in Figure 11–14. If appropriate, 500 00 Less this check P the accountant then issues a replacement check. 12,223 00 Balance carried forward Most banks charge a fee for a stop payment order. The fee appears on the bank statement. A journal entry, similar to that made Next Unused Check Stub for the bank service charge, is prepared. Most businesses record the No. 652 $ 20 Date fee in Miscellaneous Expense. The source document for this entry To is the bank statement. For Recording NSF Checks. An NSF check is a check returned Dollars Cents to the depositor by the bank because the drawer’s checking account 10,452 00 Balance brought forward does not have enough funds to cover the amount. NSF stands for Add deposits Stopped Not Sufficient Funds. An NSF check is also known as a dishonored check 500 00 Payment on Ck 633 or a bounced check. 10,952 00 Total Suppose that Burton Company (the drawer) wrote a check to Less this check Roadrunner (the payee) to pay for delivery services. What if Burton’s Balance carried forward account does not have sufficient funds to cover the amount of the check? American National Bank (the drawee) has already shown this Figure 11–14 Recording check as being deposited to Roadrunner’s account. When American a Stopped Check on the National Bank finds out that Burton does not have enough funds to cover Check Stub this check, it deducts the amount from Roadrunner’s account. The bank also sends the check back to Roadrunner (not to Burton Company). When the bank returns an NSF check, Roadrunner subtracts the amount of the dishonored check from the checkbook balance. Roadrunner also makes a journal entry to record the returned check. At this point Roadrunner has not yet been paid for the delivery services and must go back to Burton Company to collect payment. Burton can then deposit enough money in its own bank to cover the check or find another way to pay. The Check Clearing for the 21st Century Act, known as Check 21 , went AS into effect in 2004. It allows the conversion of a paper check to an electronic YOU image that can be processed quickly. A bank can now pay a check on the Key Point day it is written, instead of several days later. However, Check 21 does not require banks to process deposits more quickly. As a result, the speed of NSF Check A dishonored check processing could cause an increase in the number of NSF checks. check “bounces” back to Postdated Checks. A business might accept a check that has a future the depositor, not to the person who signed the date instead of the actual date. This check is called a postdated check . It check. should not be deposited until the date on the check. Businesses sometimes accept postdated checks as a convenience to customers.

READ

Section 2 Reconciling the Bank Statement

276-303_CH11_868829.indd 289

289

9/15/05 11:34:28 AM

B u s i n e s s Tr a n s a c t i o n On November 15 a check for $450, written by Burton Company for payment on account and deposited by Roadrunner, was returned by the bank because of insufficient funds in Burton’s account. ANALYSIS

1. Accounts Receivable—Burton Company and Cash in Bank are affected. 2. Accounts Receivable—Burton Company and Cash in Bank are both asset accounts. 3. Accounts Receivable—Burton Company is increased by the amount of the check returned by the bank, $450. Cash in Bank is decreased by $450.

Identify Classify
/

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Accounts Receivable—Burton Company for $450. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $450.

T ACCOUNTS

6.

Accounts Receivable— Burton Company Debit  450

7.

JOURNAL ENTRY

Cash in Bank

Credit


Credit
450

Debit 

GENERAL JOURNAL DATE 1 2 3

DESCRIPTION

20-Nov. 15 Accts. Rec.—Burton Company Cash in Bank

POST. REF.

PAGE DEBIT

43

CREDIT 1

4 5 0 00

2

4 5 0 00

4

3 4

Electronic Funds Transfer System What Is EFTS? Look at Figure 11–15. It illustrates the route a check follows from the time it is written until the time it is returned with the bank statement. Since millions of checks are written each day, the transfer of checks and funds is routine. This transfer of funds among banks is a huge job, however. Banks use the electronic funds transfer system (EFTS) to handle such a large volume of transfers. The EFTS allows banks to transfer funds among accounts quickly and accurately without the exchange of checks. The EFTS has a tremendous impact on banking activities: •

290

Direct payroll deposit. Employers can electronically transfer employees’ pay to each employee’s bank account.

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 290

9/15/05 11:34:29 AM

• •

• •

Automated bill paying. A depositor can authorize the bank to transfer funds from his or her checking account to the creditor’s bank account. Bankcards. A bankcard , also known as an ATM card, is a bank-issued card that can be used at an automated teller machine (ATM) to conduct banking activities. An ATM is a computer terminal outside a bank or at a different location entirely. When a bankcard can be used for transactions at other businesses besides the bank, it is called a debit card. Bank-by-phone service. Account holders can complete transactions with their banks’ computer systems by telephone. Online banking. Using the Internet, an account holder can access the bank’s Web site to conduct banking transactions.

When using any electronic banking procedure, be sure to record all transactions to avoid errors in the checking account.

Routing of Checks Roadrunner Delivery Service $ Date To For

700.00 No. 103 October 16 20 -Tooley & Co. Management Rent

Roadrunner Delivery Service

103

155 Gateway Blvd. Sacramento, CA 94230

71-627 3222 DATE

Dollars Balance brought forward Add deposits

10/14 10/15

Total Less this check

❖ American National Bank

Balance carried forward

Cents

PAY TO THE ORDER OF

21,650 00 200 00

Oct. 16

Tooley & Co. Management

20 --

Seven hundred and ❖American National Bank

1,200 00 23,050 00

1 Roadrunner writes Check 103 to Tooley & Co. Management for $700 for rent.

$ 700.00

no/100

DOLLARS

SACRAMENTO, CALIFORNIA

700 00

MEMO

22,350 00

A322271627A 303443C 103

SACRAMENTO, CALIFORNIA

Roadrunner Delivery Service 155 Gateway Boulevard Sacramento, CA 94230

Account Number: 303443

FDIC Balance Last Statement

Statement Date: 10/31/20-Deposits & Other Credits No.

00.00

3

Amount

26,400.00 Checks & Other Debits

Description

Balance Forward Deposit Check 101 Deposit Check 102 Deposit Check 103 Check 104 Service Charge

Checks & Other Debits No.

Amount

Balance This Statement

5

4,183.00

22,217.00

Date

Balance

10/01 10/04 10/14 10/15 10/16 10/20 10/31 10/31

00.00 25,000.00 22,000.00 22,200.00 21,850.00 23,050.00 22,350.00 22,225.00 22,217.00

Deposits & Other Credits

25,000.00 3,000.00 200.00 350.00 1,200.00 700.00 125.00 8.00

Tooley & Co. Management Roadrunner Delivery Service

103

155 Gateway Blvd. Sacramento, CA 94230

71-627 3222 DATE

PAY TO THE ORDER OF

Oct. 16

Tooley & Co. Management

20 --

2 Tooley & Company

Management deposits the check in its account at First National Bank.

$ 700.00

Seven hundred and no/100 ❖American National Bank

DOLLARS

SACRAMENTO, CALIFORNIA

MEMO

A322271627A 303443C 103

PLEASE EXAMINE YOUR STATEMENT AT ONCE. IF NO ERROR IS REPORTED IN 10 DAYS THE ACCOUNT WILL BE CONSIDERED CORRECT AND VOUCHERS GENUINE. ALL ITEMS ARE CREDITED SUBJECT TO FINAL PAYMENT.

The Bank for All Your Business Needs

Bank sends $700 to First National Bank and deducts this amount from Roadrunner’s account.

ACCT. 864772

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

Tooley & Co. Management

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

5 American National

FIRST NATIONAL BANK FOR DEPOSIT ONLY

the canceled check or a substitute check to Roadrunner with the monthly bank statement.

PLEASE ENDORSE HERE

6 American National Bank returns

3 First National Bank increases the balance in Tooley’s checking account by $700.

Tooley’s account increased $700

American National Bank Roadrunner Delivery Service

103

155 Gateway Blvd. Sacramento, CA 94230 DATE PAY TO THE ORDER OF

4 First National Bank sends

71-627 3222

Tooley & Co. Management

Seven hundred and no/100 ❖American National Bank

Oct. 16

20 -$ 700.00 DOLLARS

SACRAMENTO, CALIFORNIA

MEMO

A322271627A 303443C 103

the $700 check or an electronic image of it to American National Bank, Roadrunner’s bank, for collection.

Roadrunner’s account decreased $700

Figure 11–15 Routing of Checks

Section 2 Reconciling the Bank Statement

276-303_CH11_868829.indd 291

291

4/6/06 5:50:23 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to list the adjustments that might be needed to reconcile the bank statement. Add answer rows as needed.

2ECONCILINGTHE"ANK3TATEMENT #HECKBOOK"ALANCE!DJUSTMENTS

"ANK3TATEMENT"ALANCE!DJUSTMENTS

Do the Math The balance in the checkbook of Valleyview Tennis Center on April 30 is $2,944.20. The balance shown on the April bank statement is $3,085.95. A deposit of $345.00 was made on April 29, and another deposit of $290.00 was made on April 30. Neither of these deposits appears on the bank statement. The service charge for the month was $5.25. Valleyview has four outstanding checks: Check 344 Check 346

$202.00 55.00

Check 350 Check 351

$ 25.00 500.00

Instructions 1. Record the bank service charge in the checkbook. 2. Reconcile the bank statement.

Problem 11–2 Analyzing a Source Document Instructions Review the Global Travel Agency bank statement and answer the following questions in your working papers. 1. What is the amount of the returned check? 2. How much did the bank charge Global Travel Agency for the returned check? 3. What account will be debited for the $12 bank service charge?

292

Chapter 11 Cash Control and Banking Activities

276-303_CH11_868829.indd 292

9/15/05 11:35:18 AM

Accounting Careers in Focus RECRUITING MANAGER

Robert Half Finance & Accounting Washington, D.C. Raj Khanna

.. Tips from .

Q: What does Robert Half Finance & Accounting do? A: We help companies locate highly skilled financial professionals for full-time positions.

Q: How did you become a recruiter? A: I was a CPA for eight years, working in both public and private accounting environments, when my sister introduced me to a friend who owned a small recruiting firm. I had been there just a few months when the firm was acquired by Robert Half International. That’s when things really started to happen for me. I had the opportunity to travel and attend key training workshops, which really gave my career momentum.

communicate Being able to ecessary your ideas is n any work for success in Know the environment. g, are addressin audience you r u icing yo think before vo ep your opinion, and ke n simple and communicatio s your message brief to ensure r. loud and clea come through

Q: What are some factors that have been key to your success? A: Intense daily activity is critical. When it comes to providing customer service, thinking outside the box is important. These factors have helped me to establish longstanding relationships with my clients and candidates.

Q: Why do you think an accounting degree is valuable? A: Accounting is one of the most solid business foundations out there. It is a discipline that transcends any industry and is relevant at any level throughout one’s career.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Identify skilled candidates for available employment opportunities with client companies. Training or Education Needed: A bachelor’s degree in accounting or related experience. Aptitude, Abilities, and Skills: Interpersonal and communication skills, aptitude for sales, familiarity with jobs in different industries. Salary Range: $50,000 and up depending on personal performance, company performance, and company size. Career Path: Work in a public accounting firm or corporate accounting department to gain experience and knowledge, and then transfer to a recruiting position with a firm that specializes in accounting and finance.

Thinking Critically

What do you think is meant by the term company culture? What might you look for in deciding whether or not a company’s culture is right for you? Chapter 11 Accounting Careers in Focus

276-303_CH11_868829.indd 293

293

9/15/05 11:35:21 AM

CH A P T ER 11

Summary

Key Concepts 1. The term internal controls refers to steps that a business takes to protect its cash and other assets, and to keep reliable records: • Limit the number of persons who handle cash. • Separate accounting tasks that involve cash. • Bond (insure) employees who handle cash or cash records. • Use a cash register and a safe. • Make daily deposits in the bank of cash received. • Make all cash payments by check. • Reconcile the bank statement promptly. 2. To open a checking account, a business owner fills out a signature card and deposits cash in the bank. The following forms are used to maintain a checking account: • deposit slip • check • checkbook in which deposits and checks are recorded on check stubs 3. All checks written and deposits made are recorded on the check stub, which serves as a permanent record of the check. The stub should be completed before writing a check. 4. Checks should be written in ink, or by typewriter, computer, or check-writing machine. Follow these steps: (a) Write the issue date; (b) write the payee’s name on the Pay To The Order Of line starting as far left as possible; (c) write the amount of the check in numbers clearly, and begin the first number as close to the printed dollar sign as possible; (d) on the next line, write the dollar amount of the check in words starting at the left edge of the line, and write any cents as a fraction; (e) sign the check. 5. Checks are endorsed before they are deposited. Most businesses stamp a restrictive endorsement on a check as soon as it is received. A restrictive endorsement limits how checks are handled. PLEASE ENDORSE HERE

PLEASE ENDORSE HERE

PLEASE ENDORSE HERE

Rita Jain

Pay to the Order of Harold Kauffman Rita Jain

FOR DEPOSIT ONLY Roadrunner Delivery Service ACCT. 303443

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)

Blank Endorsement

Special Endorsement

Restrictive Endorsement

6. One way to prove cash is to reconcile the bank statement. Follow these steps to do a bank reconciliation: (a) Identify outstanding checks and list them on the bank reconciliation form, (b) enter the ending balance from the bank statement on the reconciliation form, (c) identify outstanding deposits and add them to the bank statement balance, (d) subtract outstanding checks from the bank statement balance, and (e) compare the adjusted bank statement balance with the checkbook balance. The bank statement is reconciled when the checkbook balance and the adjusted bank balance are equal.

294

Chapter 11 Summary

276-303_CH11_868829.indd 294

9/15/05 11:35:29 AM

Summary

CHAPT E R 1 1

7. A bank statement balance generally reflects any fees that a bank charged during the statement period. These service charges are for maintaining bank records and processing bank statement items. The depositor usually is not notified about the service charge or other bank fees until the statement arrives. The bank statement is the source document for service charges. Write the bank service charge on the check stub. Also journalize and post the service charge: GENERAL JOURNAL DATE 1 2

20-Date

3 4

POST. REF.

DESCRIPTION

1

PAGE DEBIT

CREDIT 1

Miscellaneous Expense Cash in Bank 10/31/20—Bank Statement

xx xx

2

xx xx

3 4

5

5

8. The electronic funds transfer system (EFTS) allows banks to transfer funds without the exchange of checks. EFTS makes the following services available to individuals: • direct payroll deposit • automated bill paying • bankcards • bank-by-phone service • online banking

Key Terms automated teller machine (ATM)

(p. 291)

endorsement

(p. 280)

bank service charge

(p. 286)

external controls

(p. 278)

bank statement

(p. 284)

imaged check

(p. 285)

bankcard

(p. 291)

internal controls

(p. 278)

blank endorsement

(p. 281)

NSF check

(p. 289)

canceled check

(p. 285)

outstanding checks

(p. 286)

check

(p. 278)

outstanding deposits

(p. 286)

Check 21

(p. 289)

payee

(p. 281)

checking account

(p. 278)

postdated check

(p. 289)

deposit slip

(p. 279)

reconciling the bank statement

(p. 285)

depositor

(p. 278)

restrictive endorsement

(p. 281)

drawee

(p. 282)

signature card

(p. 279)

drawer

(p. 282)

special endorsement

(p. 281)

electronic funds transfer system (EFTS)

stop payment order

(p. 289)

(p. 290)

voiding a check

(p. 282) Chapter 11 Summary

276-303_CH11_868829.indd 295

295

4/6/06 5:50:31 PM

C H A P T ER 11 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

8.

Internal Controls a. Why do businesses need internal controls? b. What internal controls can a business use to protect cash? Checking Account Forms a. What is the purpose of a signature card? b. In addition to a signature card, what other forms are involved in using a checking account? Check Stubs a. What is the purpose of a check stub? b. Why should you complete the check stub before writing the check? Writing a Check a. How should the amount be written on the check? b. Why should checks be written in ink or by typewriter, computer, or check-writing machine? Bank Deposit a. How often should a business deposit cash as part of its internal controls? b. What information should you include on a deposit slip? Bank Reconciliation a. What information does a bank statement contain? b. List the steps to reconcile a bank statement. Bank Service Charges a. What is a bank service charge? b. How does a business record bank service charges in its checkbook and in its accounting records? Electronic Funds Transfer System a. How do banks use the electronic funds transfer system (EFTS)? b. What are some of the ways customers make electronic purchases?

Apply Key Terms The manager of Valley View Bowling Center is concerned about cash control and banking procedures for the business. On a separate sheet of paper, write a memo explaining how the terms here relate to protecting cash.

296

automated teller machine (ATM) bank service charge bank statement bankcard blank endorsement canceled check check Check 21 checking account deposit slip depositor

drawee drawer electronic funds transfer system (EFTS) endorsement external controls imaged check internal controls NSF check outstanding checks outstanding deposits

payee postdated check reconciling the bank statement restrictive endorsement signature card special endorsement stop payment order voiding a check

Chapter 11 Review and Activities

276-303_CH11_868829.indd 296

4/6/06 5:50:33 PM

Computerized Accounting

CHAPT E R 1 1

Reconciling the Bank Statement Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Reconciling the bank statement

• Using the form on the back of the bank statement or accounting stationery, follow the steps on page 287 to reconcile the bank statement.

• Before attempting to reconcile the bank statement, make sure all transactions for the month have been posted. • A computerized system will list all cash transactions and allow you to check off the appropriate cleared items. • You may enter adjustments such as bank fees. These will be posted to the general ledger.

Q&A Peachtree Question How do I reconcile the cash account in Peachtree?

Answer 1. 2. 3. 4. 5. 6. 7.

Select Account Reconciliation from the Tasks menu. Select the cash account to be reconciled. Type the bank statement date. Type the ending bank statement balance. Click the Clear box for all items that appear on the bank statement. When the unreconciled difference is $0.00, the account has been reconciled. Click OK to save the reconciliation.

QuickBooks Q & A QuickBooks Question How do I reconcile the cash account in QuickBooks?

Answer 1. 2. 3. 4. 5.

Choose Reconcile from the Banking menu. Select the bank account in the Account field. Type the bank statement date. Type the ending balance and click Continue. Click each line for each item that appears on the bank statement to mark it as cleared. 6. When the Difference field shows 0.00, the account has been reconciled. 7. Click Reconcile Now to save the reconciliation.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 11 Computerized Accounting

276-303_CH11_868829.indd 297

297

9/15/05 11:36:03 AM

Problems

C H A P T ER 11 Complete problems using:

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 11–3 Handling Deposits On October 4 the owner of Wilderness Rentals deposited the following in the business checking account at First National Bank. The beginning balance in the account is $3,306.54 before these transactions.

SMART GUIDE

Cash: Checks:

Step–by–Step Instructions: Problems 11–4 1. Select the problem set for Hot Suds Car Wash (Prob. 11–4). 2. Rename the company and set the system date. 3. Use the Payments option in the Tasks menu to record the checks issued. 4. Record the deposits using the General Journal Entry option. 5. Print an Account Register report using the Account Reconciliation option from the Reports menu. 6. Complete the Analyze activity. 7. End the session.

Currency, $374.00; Coins, $7.42 Bob Warner, drawn on Consumers Bank, ABA No. 63-706; $64.98 Joan Walkman, drawn on Mountain Bank, ABA No. 63-699; $349.81 Ernesto Garcia, drawn on Progressive Savings and Loan, ABA No. 63-710; $29.44

Instructions In your working papers: 1. Place a restrictive endorsement on each check. Use “Wilderness Rentals.” 2. Fill out a deposit slip. Use the ABA number to identify each check. 3. Record the deposit in the checkbook on Check Stub 651.

Analyze

Calculate the checkbook balance after the deposit is recorded on the check stub.

Problem 11–4 Maintaining the Checkbook As the accounting clerk for Hot Suds Car Wash, you write checks and make deposits. The current checkbook balance is $3,486.29.

Instructions For each transaction: SMART GUIDE Step–by–Step Instructions: Problem 11–5 1. Select the problem set for Kits & Pups Grooming (Prob. 11–5). 2. Rename the company and set the system date. 3. Reconcile the bank statement. 4. Print the Account Reconciliation reports: Account Register, Account Reconciliation, Deposits in Transit, and Outstanding Checks. 5. Complete the Analyze activity. 6. End the session.

298

1. Record the necessary information on the check stub. Determine the new balance and carry the balance forward. 2. Prepare the necessary checks and sign your name as drawer. Date

Oct.

Transactions

3 Issued Check 504 for $868.45 to Custom Construction for construction supplies. 3 Deposited $601.35 in the checking account. 6 Issued Check 505 for $299.60 to CP Lumber for paint. 7 Issued Check 506 to Laverne Brothers for $1,000.00 for completing a painting job. 10 Deposited $342.80 in the checking account. 10 Issued Check 507 to Union Utilities for the September electricity bill of $175.50.

Analyze

Calculate the balance brought forward amount on Check Stub 508.

Chapter 11 Problems

276-303_CH11_868829.indd 298

9/15/05 11:36:05 AM

Problems Problem 11–5 Reconciling the Bank Statement On October 31 George Flaum, the accountant for Kits & Pups Grooming, received the bank statement dated October 30. After comparing the company’s checkbook with the bank statement, George found the following: 1. The checkbook balance on October 31 is $960. 2. The ending bank statement balance is $1,380. 3. The bank statement shows a service charge of $10. 4. A deposit of $405 was made on October 30, but does not appear on the bank statement. 5. Check 768 for $529 and Check 772 for $306 are outstanding.

Instructions In your working papers: 1. 2. 3. 4.

Record the bank service charge in the checkbook. Reconcile the bank statement. Journalize the bank service charge in the general journal, page 4. Post the bank service charge journal entry to the appropriate general ledger accounts.

Analyze

How many checks are outstanding? Identify the total amount that is outstanding.

Problem 11–6 Reconciling the Bank Statement On October 31 Juanita Ortega, owner of Outback Guide Service, received a bank statement dated October 30. Juanita found the following: 1. The checkbook has a balance of $2,551.34. 2. The bank statement shows a balance of $2,272.36. 3. The statement shows a bank service charge of $20.00. 4. A check from Podaski Systems for $62.44, deposited on October 18, was returned by the bank. There is no fee for handling the NSF check. 5. A deposit of $672.48 made on October 30 does not appear on the bank statement. 6. These checks are outstanding: Check 872 for $126.84 Check 883 for $192.80 Check 881 for 87.66 Check 887 for 68.64

Instructions Using the preceding information: 1. Record the service charge and the NSF check in the checkbook. 2. Reconcile the bank statement. 3. Record the service charge and NSF check on page 7 of the general journal. 4. Post the journal entries to the appropriate general ledger accounts.

Analyze

Review the Miscellaneous Expense account found in your working papers. Identify the Miscellaneous Expense account balance after posting the October 31 entry.

CHAPT E R 1 1 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 11–5 1. Restore the Problem 11-5.QBB file. 2. Reconcile the bank statement using the Reconcile option in the Banking menu. 3. Print a Detail reconciliation report and the Cash in Bank register. 4. Complete the Analyze activity. 5. Back up your work.

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 11–6 1. Select the spreadsheet template for Problem 11–6. 2. Complete the spreadsheet using the instructions in your working papers. 3. Print the spreadsheet and proof your work. 4. Save your work and exit the spreadsheet program.

SMART GUIDE Step–by–Step Instructions: Problem 11–7 1. Select the problem set for Showbiz Video (Prob. 11–7). 2. Rename the company and set the system date. 3. Reconcile the bank statement using the Account Reconciliation option in the Tasks menu. 4. Print the Account Reconciliation reports. 5. Complete the Analyze activity. 6. End the session.

Chapter 11 Problems

276-303_CH11_868829.indd 299

299

9/15/05 11:36:07 AM

Problems

C H A P T ER 11

Problem 11–7 Reconciling the Bank Statement QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 11–7 1. Restore the Problem 11-7.QBB file. 2. Reconcile the bank statement. 3. Print a Detail reconciliation report and the Cash in Bank register. 4. Complete the Analyze activity. 5. Back up your work.

On October 31 Showbiz Video received the bank statement dated October 30. The accountant reviewed it and found the following: 1. The checkbook balance on October 31 is $13,462.96. 2. The ending bank statement balance is $13,883.80. 3. The bank statement shows a service charge of $17.50. 4. Deposits of $675.00 on October 28 and $925.00 on October 29 do not appear on the bank statement. 5. The following checks are outstanding: Check 1766 $125.00 Check 1770 $1,462.19 Check 1768 69.42 Check 1771 381.73

Instructions In your working papers: 1. 2. 3. 4.

Record the bank service charge in the checkbook in your working papers. Reconcile the bank statement. Record the entry for the bank service charge on general journal page 13. Post the bank service charge journal entry to the proper ledger accounts.

Analyze

SOURCE DOCUMENT PROBLEM Problem 11–8 Use the source document in your working papers to complete this problem.

SMART GUIDE Step–by–Step Instructions: Problem 11–8 1. Select the problem set for Job Connect (Prob. 11–8). 2. Rename the company and set the system date. 3. Reconcile the bank statement. 4. Print the Account Reconciliation reports. 5. Complete the Analyze activity. 6. End the session.

300

Calculate the Cash in Bank balance after the October 31 posting. Does it agree with the adjusted checkbook balance?

Problem 11–8 Reconciling the Bank Statement Using the Account Form

CHALLENGE PROBLEM

On October 20 Job Connect received its bank statement dated October 18. 1. The checkbook balance on October 20 is $880.84. 2. The ending bank statement balance is $344.58. 3. A $14.00 service charge appears on the bank statement. 4. The following checks are outstanding: Check 864 $ 88.41 Check 871 $129.88 Check 869 69.34 Check 873 14.25 5. A $68.42 check from Tom McCrary deposited on October 13 was returned by the bank for insufficient funds. The bank charged Job Connect’s account $7.00 for the NSF check. No journal entry was made for the NSF check. 6. A $938.72 deposit on October 19 is not on the bank statement. 7. A check for $200.00 to Fontenot Inc. was lost in the mail and has not been deposited. A stop payment order, which cost $10.00, was issued on October 15. No new check was issued.

Instructions Reconcile the bank statement using the account form in your working papers.

Analyze

Identify the account that will be debited for both the NSF check and the bank handling charge on the check.

Chapter 11 Problems

276-303_CH11_868829.indd 300

4/6/06 5:50:43 PM

Winning Competitive Events

CHA PTER 11

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE Use the following choices for questions 1–3. Indicate whether the following items in a bank reconciliation should be a. added to the checkbook balance. b. deducted from the checkbook balance. c. added to the bank statement balance. d. deducted from the bank statement balance. 1. Outstanding deposit of $1,200 2. An NSF check from customer Anne Campbell for $52 3. An outstanding check for $185 written to Cole Realty 4. The bank statement shows a checking account balance of $5,500. There are outstanding checks totaling $600, an outstanding deposit of $400, and a bank service charge of $15. The cash account balance should be a. $5,300. b. $5,700. c. $5,285. d. none of the above.

Business Professionals of America MULTIPLE CHOICE 5. The first step in balancing a checkbook is a. subtracting fees on the bank statement from the checkbook balance. b. comparing checks in the check record with those on the statement. c. adding interest earned to the checkbook balance. d. adding recent deposits to the bank statement balance.

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 11. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

276-303_CH11_868829.indd 301

Chapter 11 Winning Competitive Events

301

10/13/05 10:10:50 PM

C H A P T ER 11 Critical Thinking

Cash Control

CASE

STUDY

Service Business: Entertainment

ETHICS

Pocketing Differences

a mattoefr

))

$ )) Communicating ACCOUNTING

302

Real-World Applications and Connections

1. Define internal controls. 2. Explain why the balance in the checkbook can differ from the balance on the bank statement. 3. Your bank sent you a dishonored check. What should you do? 4. Contrast check processing before Check 21 to check processing after Check 21. What are the differences? 5. Suppose you carry out all your transactions electronically. How do you reconcile your bank statement? 6. Assess the value of the electronic funds transfer system. Dexter Shuman owns a bowling alley called Ten Pin Alley. Each night, Dexter counts the cash in the two cash registers and makes a night deposit at the local bank. For the month of May, Dexter made deposits totaling $6,400. During May, Dexter wrote checks totaling $2,900. The last three checks he wrote were Check 1408 for $180; Check 1409 for $560; and Check 1410 for $212. The beginning cash balance for the month was $13,840, which is the amount shown as the beginning balance on the May bank statement. That statement also includes a $12 service charge and an $18 charge for printing new checks. INSTRUCTIONS 1. Determine the ending bank statement balance if all checks written have cleared. 2. Determine the ending bank statement balance if Checks 1408, 1409, and 1410 are outstanding. 3. Calculate the balance of the Cash in Bank account. Imagine that you are a cashier at a grocery store like Ralphs. In a four-hour shift, you handle thousands of dollars. At the end of your shift, you total receipts and cash to see if they match. One day cash comes up short, and you report the discrepancy to the manager. A few weeks later, cash is over by $2. You know a couple of cashiers who pocket extra cash. You wonder who would miss $2. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Making the Case for Daily Deposits Assume that you work for a sporting goods store that is open six days a week, 12 hours a day. A major promotion is resulting in record sales, and the manager has been too busy to make daily cash deposits. Discuss with your classmates and teacher the importance of taking time to make cash deposits every day.

Chapter 11 Real-World Applications and Connections

276-303_CH11_868829.indd 302

9/15/05 11:36:11 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Customer Service As a personal banker for Citizen’s First National Bank, your duties include opening personal bank accounts, taking loan applications, and serving bank customers. Today Ms. Kelley wants to open a checking account. What items would you put in an information packet about opening her account? Pair up with another student and role-play teaching the new client to write a check and fill out a deposit slip. Model the customer service principles of thoroughness, courtesy, and respect.

Cash Management Imagine how difficult it would be to control cash for hundreds of locations in the United States, Europe, and Asia. Many international companies select one large bank that can handle transactions in multiple currencies and countries. INSTRUCTIONS Identify reasons why you would prefer to work with one bank if you were in charge of cash control for an international business.

Your Bank Statement If you have a checking account, you know that the balances on the bank statement and in the checkbook seldom agree. You recognize the importance of reconciling the two balances so that you will know exactly how much money you have in the account. PERSONAL FINANCE ACTIVITY Imagine that you just received your monthly bank statement. When comparing it to the checkbook, you found a $200.00 deposit that was not on the bank statement and two checks totaling $145.00 that were outstanding. The bank statement balance was $1,370.00 and the checkbook balance is $1,425.00. What is the reconciled balance? PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 11.

Evaluating Working Capital One measure of a company’s ability to pay debts is its working capital. Working Capital  Current Assets  Current Liabilities Current assets are cash and assets that will be converted to cash within the next accounting period. Current liabilities are debts that must be paid within the next accounting period. INSTRUCTIONS Refer to Roadrunner’s balance sheet on page 233. If Maria Sanchez had made a $1,000 withdrawal, how would each of the following change? 1. Current assets 2. Current liabilities 3. Working capital

glencoeaccounting.glencoe.com

276-303_CH11_868829.indd 303

CHAPT E R 1 1

Bank Reconciliations A big-name sports team must reconcile its bank statements just like your local batting cage business. Visit glencoeaccounting .glencoe.com and click on Student Center. Click on WebQuest and select Unit 2 to continue your Internet project.

Chapter 11 Real-World Applications and Connections

303

4/6/06 5:50:49 PM

MINI PRACTICE SET 2

Completing the Accounting Cycle for a Sole Proprietorship

Main Task ▲

Set up the accounting records and complete the accounting cycle for Fast Track Tutoring Service.

Summary of Steps ▲

Open general ledger accounts.

▲

Analyze, journalize, and post transactions.

▲

Reconcile the bank statement.

▲

Journalize and post the bank service charge.

▲

Prepare a trial balance, a work sheet, and the financial statements.

▲

Journalize and post the closing entries.

▲

Prepare a post-closing trial balance.

Why It’s Important ▲

This project pulls together all of the concepts and procedures you have learned.

Fast Track Tutoring Service

TUTORING SE RVIC E

Company Background: Fast Track Tutoring Service is owned and managed by Jennifer Rachael. It has been in business for one month. The business is organized as a sole proprietorship and provides tutoring services in a number of disciplines for students from prekindergarten through high school. The business earns revenue from tuition charged for one-on-one instruction and special classes. Your Job Responsibilities: As the accounting clerk for this business, use the accounting stationery in your working papers to complete the following activities. (1) Open a general ledger account for each account in the chart of accounts. (2) Analyze each business transaction. (3) Enter each business transaction in the general journal. Begin on journal page 1. (4) Post each journal entry to the appropriate accounts in the general ledger. (5) Reconcile the bank statement that was received on December 31. The statement is dated December 30. The checkbook has a current balance of $9,631. The bank statement shows a balance of $9,844. The bank service charge is $15. These checks are outstanding: Check 108, $183 and Check 109, $45. There are no outstanding deposits. (6) Make any necessary adjustments to the checkbook balance. (7) Journalize and post the entry for the bank service charge. (8) Prepare a trial balance and complete the work sheet. (9) Prepare an income statement, a statement of changes in owner’s equity, and a balance sheet. (10) Journalize and post the closing entries. (11) Prepare a post-closing trial balance.

Business Transactions: Fast Track Tutoring Service began business operations on December 1 of this year.

304

Mini Practice Set 2

304-305_MPS02_868829.indd 304

4/6/06 5:52:40 PM

Fast Track Tutoring Service (continued) Complete the project using:

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

CHART OF ACCOUNTS Fast Track Tutoring Service ASSETS 101 110 120 140 150 155

Cash in Bank Accts. Rec.—Carla DiSario Accts. Rec.—George McGarty Office Supplies Office Equipment Instructional Equipment

LIABILITIES 210 Accts. Pay.—Educational Software 215 Accts. Pay.—T & N School Equip. OWNER’S EQUITY

305 Jennifer Rachael, Withdrawals 310 Income Summary REVENUE 401 Group Lessons Fees 405 Private Lessons Fees EXPENSES 505 510 515 525

Maintenance Expense Miscellaneous Expense Rent Expense Utilities Expense

301 Jennifer Rachael, Capital

Date Dec. 1

Transactions Jennifer Rachael invested $25,000 in the business, Memo 1.

2

Bought a cash register (Office Equipment) for $525, Check 101.

2

Purchased $73 in office supplies, Check 102.

5

Purchased instructional computers for $13,924, Check 103.

5

Received $950 for private instruction, Receipt 1.

6

Bought $8,494 of instructional materials, Invoice 395, from Educational Software on account.

8

Billed Carla DiSario for two group classes, $36, Invoice 101.

9

Wrote Check 104 for $850 for the December rent.

10

Billed George McGarty $275 for special group classes, Invoice 102.

10

Received Invoice 5495 for a $2,375 microcomputer system, for office use, bought on account from T & N School Equipment.

11

Prepared Receipt 2 for $695 for 20 private lessons given between December 1 and December 10.

13

Received $36 from Carla DiSario on account, Receipt 3.

14

Sent Check 105 for $200 to Educational Software on account.

15

Wrote Check 106 for $750 to repaint two classrooms.

18

Jennifer Rachael withdrew $500 for personal use, Check 107.

20

Sent Check 108 for the electric bill of $183.

24

Issued Check 109 for $45 for stamps (Miscellaneous Expense).

Analyze

Identify the creditor to which Fast Track Tutoring Service owed the most money on December 31.

SMART GUIDE Step–by–Step Instructions: 1. Select the problem set for Fast Track Tutoring Service (MP–2). 2. Rename the company and set the system date. 3. Record all of the transactions. 4. Reconcile the bank statement. 5. Print a General Journal report and proof your work. 6. Print the Account Reconciliation reports. 7. Print a General Ledger and a Trial Balance. 8. Print the financial statements. 9. Close the fiscal year. 10. Print a post-closing trial balance. 11. Complete the Analyze activity and complete the Audit Test. 12. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: 1. Restore the Mini Practice Set 2.QBB file. 2. Record all of the transactions. 3. Reconcile the bank statement. 4. Print a Detail Reconciliation report. 5. Print a Journal report. 6. Print the register for the Cash in Bank account. 7. Print a General Ledger. 8. Print a Trial Balance. 9. Print a Profit and Loss report and Balance Sheet. 10. Close the fiscal year. 11. Print a post-closing Trial Balance. 12. Complete the Analyze activity and the Audit Test. 13. Back up your work.

Mini Practice Set 2

304-305_MPS02_868829.indd 305

305

4/6/06 5:52:47 PM

UNIT 3

Accounting for a Payroll System

Personal Finance Q & A Q: Why should I learn about payroll? A: Payroll is important to everyone. When you are paid at your job, you want to be sure the amounts are correct. The business also wants to be sure that all employees are paid in a legal and correct manner. Q: What is the minimum wage? A: The current federal minimum wage is $5.15 per hour. A business must also meet its state’s minimum wage requirement, which is sometimes higher. THINK IT OVER Do you agree with the law requiring employees to pay taxes on their earnings? Why or why not? 306

306-307_UN03_868829.indd 306

4/6/06 5:56:00 PM

Internet Project You’re the Boss Employees have different goals and are motivated to work for a variety of reasons. You need to know how to pay your employees in a way that is appropriate and that motivates them to do the best job possible. In this online activity, you will learn different ways to pay and motivate your employees. Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on WebQuest and select Unit 3. Begin your WebQuest by reading the Task. Chapter 12

Continue working on your WebQuest as you study Unit 3.

Page

13

337 371

THE BIG PICTURE A CAUTIOUS BONUS BOOST Estimated bonus pay for the lucky workers expected to receive such a windfall, as a percentage of base salary: 35% 30 25 20 15 10 5 0

EXECUTIVES

SUPERVISORS AND MANAGERS

PROFESSIONALS

Data: Mercer Human Resources Consulting

CLERKS/ ADMINISTRATIVE ASSISTANTS

NONUNION HOURLY WORKERS

Source: Reprinted by permission from BusinessWeek.

glencoeaccounting.glencoe.com

306-307_UN03_868829.indd 307

307

9/13/05 4:44:28 PM

CH A P T ER 12

Payroll Accounting BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the importance of accurate payroll records.

2.

Compute gross pay using different methods.

1. 2. 3. 4.

3.

Explain and compute employee-paid withholdings.

4.

Compute net pay.

5.

Prepare payroll registers.

MOVING INTO THE WORKFORCE

6.

Explain the methods of distributing payroll funds.

Symantec Corporation

7.

Prepare an employee’s earnings record.

to help users manage and protect their computer systems and

Define the accounting terms introduced in this chapter.

become a market leader with $1 billion in annual revenue.

Why It’s Important

of the lowest employee loss rates in the United States. From

8.

▲

Tax and labor laws protect the rights of both the employee and the employer.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business

Since 1982 Symantec Corporation has designed programs files. Under John Thompson, CEO since 1999, Symantec has Symantec believes in treating its employees right. It has one software engineers to accountants, more than 5,000 employees deliver award-winning products and services. CEO Thompson believes employees stay at Symantec because the work is challenging and morale is high. The long list of benefits—health-care plans, educational assistance, retirement plans, performance bonuses, and stock options—are just a few perks that keep employees happy.

What Do You Think? Describe the kind of company culture and benefits that would make you happy in a job.

308

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 308

4/6/06 5:56:43 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE When you get your paycheck, do you look at it carefully to see how much you have earned and what amounts have been deducted from the total? Employers are required to make certain deductions from your pay. You may also request voluntary deductions. You will learn about both types of deductions in this chapter.

glencoeaccounting.glencoe.com

308-337_CH12_868829.indd 309

Personal Connection Look at your last pay stub. If money was deducted from your earnings, what do you think it was taken for?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 12.

309

9/15/05 11:41:40 AM

SECTION 1

BEFORE YOU

Calculating Gross Earnings In a private enterprise economy, people are free to work for any business they choose—as long as they meet the requirements for employment. Employers such as Ford Motor Company, Pier 1, and Symantec Corporation rely on their employees to operate the business and pay their employees for the services they perform. In paying their employees, businesses follow certain guidelines. For example, both federal and state laws require businesses to keep accurate payroll records and to report employees’ earnings. Most companies set up a payroll system to ensure that their employees are paid on time and that payroll checks are accurate. In this chapter you will learn about the payroll system.

READ

Main Idea

Gross earnings is the total amount an employee earns in a pay period.

Read to Learn… ➤ the two main functions of

a payroll system. (p. 310) ➤ the different methods of computing gross pay. (p. 311)

Using a Payroll System What Is a Payroll System?

Key Terms

A payroll is a list of the employees and the payments due to each employee for a specific pay period. A pay period is the amount of time over which an employee is paid. Most businesses use weekly, biweekly (every two weeks), semimonthly (twice a month), or monthly pay periods. The payroll expense is a major expense for most companies. To compute salary expenses, most businesses set up a payroll system for recording and reporting employee earnings information. A well-designed payroll system achieves two goals:

payroll pay period payroll clerk gross earnings salary wage time card electronic badge readers commission piece rate overtime rate

1. The collection and processing of all information needed to prepare and issue payroll checks. 2. The generation of payroll records needed for accounting purposes and for reporting to government agencies, management, and others. Businesses with many employees often hire a payroll clerk . The payroll clerk responsible for preparing the payroll • • • • •

makes sure employees are paid on time, makes sure each employee is paid the correct amount, completes payroll records, submits payroll reports, and pays payroll taxes.

All payroll systems have certain tasks in common, as shown in Figure 12–1.

310

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 310

9/15/05 11:42:15 AM

ns deductio Calculates

s ng i rn

Ca lc ul at es

ea

THE PAYROLL SYSTEM

roll ts pay Repor o ati n inform ment ern to gov

Records earnings and deductions in the payroll and accounting records

Prepares payroll checks

Figure 12–1 The Payroll System

Computing Gross Pay How Do You Calculate Gross Earnings? Most employees are paid for the specific amount of time they work during a pay period. The total amount of money an employee earns in a pay period is the employee’s gross earnings , or gross pay. The gross earnings expense is sometimes called salary expense. The method used to compute gross pay depends on the basis on which an employee is paid. Employees can be grouped into different pay categories: • • •

salary hourly wage commission

• •

salary plus commission or bonus piece rate

Some employees are entitled to overtime pay. Let’s look at each method of paying employees.

Salary One common method of paying employees, especially those who are managers or supervisors, is by salary. A salary is a fixed amount of money paid to an employee for each pay period. In other words, an employee who is paid a salary earns the same amount regardless of the number of hours worked during the pay period. For example, Paula Ferguson, an administrative assistant, is paid a salary of $2,000 a month. Her gross earnings are $2,000 for each monthly pay period. Paula may work 160 hours in one month and 170 hours in the next, but her gross earnings for each of the two months are the same—$2,000.

AS YOU

READ

It’s Not What It Seems Gross In accounting gross does not have a negative meaning. The term gross refers to an amount before anything is deducted or subtracted.

Section 1 Calculating Gross Earnings

308-337_CH12_868829.indd 311

311

9/15/05 11:42:21 AM

Hourly Wage Another common way of paying employees is the hourly wage. A wage is an amount of money paid to an employee at a specified rate per hour worked. The number of hours worked multiplied by the hourly wage equals the gross earnings for the pay period. For example, Emily Kardos, a delivery driver for Roadrunner, is paid $6.75 per hour. During the last weekly pay period, she worked 36 hours. Emily’s gross earnings are $243.00 (36 hours
$6.75). Many employees are required to use time cards to accurately record their work hours during each pay period. A time card is a record of the times an employee arrives at work and leaves each day. The times may be recorded manually or by a time clock. The time card also shows the total hours worked each day. Figure 12–2 shows a manual time card. Many businesses divide an hour into four 15-minute quarters to measure employee work time. These quarter hours are determined as follows:

11 NAME Emily Kardos 201-XX-XXXX SOC. SEC. NO. 6/30/20-WEEK ENDING NO.

DAY

IN

OUT

IN

OUT

IN

OUT

TOTAL

M

7:58 12:25 1:32 4:18

7 1/4

T

8:00 12:00 12:45 4:00

7 1/4

W

7:56 12:01 1:10 4:15

7

Th

8:01 11:55 1:02 4:16

7 1/4

F

7:45 12:02 1:05 3:58

7 1/4

S S TOTAL HOURS HOURS REGULAR OVERTIME

36

RATE

AMOUNT

$6.75

$243.00

0 TOTAL EARNINGS

SIGNATURE

Emily Kardos

Figure 12–2 An Employee Time Card

312

36

DATE

$243.00

6/30/20--

Quarter Hour On the hour 15 minutes after the hour 30 minutes after the hour 45 minutes after the hour

Example 2:00 p.m. 2:15 p.m. 2:30 p.m. 2:45 p.m.

Employees seldom arrive and leave exactly on the quarter hour. As a result, some companies round arrival and departure times to the nearest quarter hour. Employees, therefore, are paid for working to the nearest quarter hour. Look at Figure 12–2. The times appearing on the time card for Emily Kardos for Monday will be rounded to the nearest quarter hour as follows: Actual Time Recorded 7:58 a.m. 12:25 p.m. 1:32 p.m. 4:18 p.m.

Nearest Quarter Hour 8:00 a.m. 12:30 p.m. 1:30 p.m. 4:15 p.m.

Emily will be paid for working on Monday from 8:00 a.m. to 12:30 p.m. (4½ hours) and from 1:30 p.m. to 4:15 p.m. (2¾ hours) for a total of 7¼ hours. Some businesses use computer technology to track employee arrival and departure times. One method uses electronic badge readers . The employee has an identification badge with a magnetic strip that contains employee information. The employee inserts the identification badge into a reader, which scans the magnetic strip and transfers the following information directly to the computer: the employee’s name, the department or area where the employee works, and the arrival or departure time. This electronic equipment makes it fast and easy to prepare a daily printout of employee work hours. Regardless of how employee work hours are recorded (manually, time clock, or electronic reader), business owners and supervisors check the accuracy of the hours reported and analyze the labor costs for every pay period.

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 312

9/15/05 11:43:43 AM

Commission A commission is an amount paid to an employee based on a percentage of the employee’s sales. Sales employees are often paid a commission to encourage them to increase their sales. For example, Joyce Torrez is paid a 5% commission on all her sales. Last week Joyce’s total sales were $8,254. Joyce’s gross earnings for the week are $412.70 ($8,254
.05).

Salary Plus Commission or Bonus Some salespeople earn a base salary plus a commission or a bonus on the amount of their sales. For example, Juan Espito, who works at a car stereo shop, is paid a salary of $200 per week plus a commission of 3% of his sales. Juan’s sales were $4,810 last week. His gross earnings are $344.30 [$200  ($4,810
.03)].

Piece Rate Some manufacturing companies pay employees a specific amount of money for each item the employee produces. This method of payment is called piece rate . Businesses often pay a low hourly rate in addition to the piece rate.

Overtime Pay State and federal laws regulate the number of hours some employees may work in a week. Generally, employers are required to pay overtime when employees covered by these laws work more than 40 hours per week. The overtime rate , set by the Fair Labor Standards Act of 1938, is 1½ (1.5) times the employee’s regular hourly pay rate. For example, Jesse Dubow, a photo-lab clerk at Fast Photo, worked 43 hours last week. Jesse’s hourly rate of pay is $6.60. His hourly overtime rate is $9.90 ($6.60
1.5). His gross earnings for the week are $293.70 determined as follows:

Regular Overtime Total

Hours 40 3





Rate $6.60 $9.90

Hours 4

READ

In Your Experience  

$264.00 29.70 $293.70

Some employees who are paid a salary are also entitled to overtime pay. If a salaried employee is paid overtime, the salary is converted to an hourly rate using a standard number of hours for the period covered by the salary. Then the hourly overtime rate is calculated. For example, Jim Halley’s salary is $600 per week. His hourly rate is $15 assuming a standard 40-hour work week ($600  40). His hourly overtime rate is $22.50 ($15
1.5). Jim’s gross earnings for a 44-hour week are $690, determined as follows:

Regular Overtime Total

AS YOU

Pay Categories If you or your friends have parttime jobs, what is the pay category?

Rate


$22.50

 

$600.00 90.00 $690.00

Section 1 Calculating Gross Earnings

308-337_CH12_868829.indd 313

313

9/15/05 11:43:45 AM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Create a table similar to this one. For each category of employee, list the source of information for calculating gross earnings in a single pay period.

-ETHOD

3OURCEOF)NFORMATION

3ALARY (OURLY7AGE #OMMISSION 3ALARYPLUS#OMMISSION

Do the Math You have been interviewing with several financial consulting firms for entry-level management positions, and you received two job offers. One company, Bryson Consulting, offers you a starting salary of $30,000 with a 2% bonus (on salary) if you can bring 10 new clients into the firm. The other company, The Patterson Group, offers a salary of $25,000 plus a 3% commission on all new client billings. If you bring 10 new clients to Bryson, what would the amount of your bonus be? How much in new business would you have to bring to Patterson to equal the bonus from Bryson? Which offer seems to have the higher earnings potential? Why?

Problem 12–1 Calculating Gross Earnings Cleary’s Music Center has nine employees. The employees are paid weekly with overtime after 40 hours per week. The overtime rate is 1½ times the regular rate of pay. Payroll information for the week ending June 12 follows: Employee David Clune Richard Lang Jane Longas Betty Quinn John Sullivan Kelly Talbert Gene Trimbell Heidi Varney Kevin Wallace

Pay Rate $6.95 $7.80 $7.25 $8.30 $8.30 $7.50 $9.75 $8.75 $9.25

Hours 331⁄2 38 43 441⁄4 391⁄2 40 421⁄2 341⁄4 46

Instructions Prepare a form similar to the one that follows. Calculate regular earnings, overtime earnings, and gross earnings for each employee.

314

Employee

Total Hours

Pay Rate

Clune, David

331/2

$6.95

Regular Overtime Earnings Earnings $232.83

–0–

Gross Earnings $232.83

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 314

9/15/05 11:44:46 AM

SECTION 2

Payroll Deductions

Whether you work at Target, McDonald’s, or CompUSA, your earnings and deductions are determined in the same way. In this section you will compute the amounts withheld from an employee’s earnings. The first time you received a payroll check, you were probably surprised that its amount was less than you expected. Various amounts had been taken out of your gross earnings. An amount subtracted from gross earnings is a deduction . Deductions include those required by law and those an employee wishes to have withheld from earnings.

Main Idea

Deductions Required by Law

➤ the deductions required

What Amounts Must Be Deducted from Earnings? An employer is required by law to withhold payroll taxes. These taxes include the federal income tax and the social security tax. In addition, employers often must withhold city and state income tax.

Federal Income Tax Most people pay the federal government a tax based on their annual income. To ensure that employees have the funds to pay their income taxes, employers are required to withhold a certain amount of money from each payroll check. The employer acts as a collection agent and sends the money withheld to the federal government. The amount of income tax withheld is based on the estimated income tax the employee will actually owe. The exact income tax amount is determined when the employee prepares an income tax return. If too much money was withheld, the Internal Revenue Service (IRS) refunds the overpayment. If too little money was withheld, the employee pays the amount due when the income tax return is filed. To avoid penalties, an employee should have at least 90% of the actual tax liability deducted. Form W-4. The federal income tax amount withheld depends on three factors: (1) the employee’s marital status, (2) the number of allowances the employee claims, and (3) the employee’s gross earnings. The first two items are found on Form W-4, the Employee’s Withholding Allowance Certificate. Each employee fills out a Form W-4 when starting a job and files a revised Form W-4 if the marital status or number of allowances changes. Employers keep a current Form W-4 on file for each employee. Figure 12–3 on page 316 shows the completed Form W-4 for Emily Kardos. The Form W-4 includes the employee’s name, address, social security number, and marital status. The employee also lists the number of allowances claimed (refer to line 4). A withholding allowance reduces the amount of

BEFORE YOU

READ

Payroll deductions are amounts withheld from an employee’s gross earnings.

Read to Learn… by law. (p. 315) ➤ the deductions an employee can choose. (p. 318)

Key Terms

deduction withholding allowance 401(k) plan

Section 2 Payroll Deductions

308-337_CH12_868829.indd 315

315

9/15/05 11:44:51 AM

Cut here and give the certificate to your employer. Keep the top portion for your records.

W-4

Form Department of the Treasury Internal Revenue Service

Employee’s Withholding Allowance Certificate

OMB No. 1545-0010

For Privacy Act and Paperwork Reduction Act Notice, see reverse. Last Name

1 Type or print your first name and middle initial

Emily

M.

Kardos ✓Single

Home address (number and street or rural route)

809 East Main Street

3 Marital Status

City or town, state, and ZIP code

20 --

2 Your social security number

Sacramento, CA 94230

201-XX-XXXX Married

Married, but withhold at higher Single rate Note: If married, but legally separated, or spouse is a nonresident alien, check the Single box.

4 Total number of allowances you are claiming (from line G above or from the Worksheets on back if they apply) . . . 4 5 $ 5 Additional amount, if any, you want deducted from each pay . . . . . . . . . . . . . . . . 6 I claim exemption from withholding and I certify that I meet ALL of the following conditions for exemption: • Last year I had a right to a refund of ALL federal income tax withheld because I had NO tax liability: AND • This year I expect a refund of ALL Federal income tax withheld because I expect to have NO tax liability; AND • This year if my income exceeds $500 and includes nonwage income, another person cannot claim me as a dependent. If you meet all of the above conditions, enter the year effective and “EXEMPT” here . . . . 6 7 Are you a full-time student? (Note: Full-time students are not automatically exempt.) . . . . . . . . . 7 Yes

0

✓No

Under penalty of perjury, I certify that I am entitled to the number of withholding allowances claimed on this certificate or entitled to claim exempt status.

Employee’s signature

Emily M. Kardos

Date

8 Employer’s name and address (Employer: Complete 8 and 10 only if sending to IRS)

Roadrunner Delivery Service

155 Gateway Blvd. Sacramento, CA 94230

9 Office code

January 3

(optional)

•

--

31-8042398

Figure 12–3 Employee’s Withholding Allowance Certificate—Form W-4 • • •

20

10 Employee identification number

income tax to be withheld. The more allowances a taxpayer claims, the lower the amount of income tax withheld from earnings. A taxpayer is usually allowed one personal allowance and one allowance for each person he or she supports (such as a child). Some employees are exempt from federal income tax withholding. An employee is not required to have income tax withheld if he or she

did not have a federal income tax liability in the previous year, expects no tax liability this year, has income of $700 or less including nonwage income such as savings account interest, and cannot be claimed as a dependent on someone else’s tax return.

An exempt employee writes EXEMPT on Form W-4 so the employer will know not to withhold federal income tax. Tax Tables. An employee’s gross earnings affect the amount withheld for federal income taxes. Most employers use IRS tables to determine the amount of federal tax to withhold. See Figure 12– 4 for tables for single and married persons paid weekly. Other tax tables are available. Let’s use the tables to determine the tax withheld for Emily Kardos. She is single and claims no allowances. For the week ending June 30, she earned $243. This amount falls between $240 and $250 on the tax table for single persons. Reading across this line to the column for zero withholding allowances, you find that $29 is withheld from Emily’s gross earnings.

Social Security Tax Employers also collect social security taxes for the federal government. Established by the Federal Insurance Contributions Act (FICA) in 1935, social security taxes are often called FICA taxes. FICA taxes have two components: social security and Medicare. Each is listed separately on payroll records. The social security tax funds programs that provide income to certain individuals: 1. The old-age and disability insurance programs provide income to people who are retired or disabled and their dependent children. 2. The survivors’ benefits program provides income to the spouse and dependent children of a deceased worker. The Medicare tax finances health insurance benefits for people who are elderly or disabled.

316

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 316

9/15/05 11:44:56 AM

SINGLE Persons—WEEKLY Payroll Period If the wages are – less At least But than

And the number of withholding allowances claimed is – 0

1

2

3

4

5

6

7

8

9

10

The amount of income tax to be withheld is – $0 55 60 65 70

$55 60 65 70 75

0 1 2 2 3

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

75 80 85 90 95

80 85 90 95 100

4 5 5 6 7

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

100 105 110 115 120

105 110 115 120 125

8 8 9 10 11

0 1 2 2 3

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

125 130 135 140 145

130 135 140 145 150

11 12 13 14 14

4 5 5 6 7

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

150 155 160 165 170

155 160 165 170 175

15 16 17 17 18

8 8 9 10 11

0 1 1 2 3

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

175 180 185 190 195

180 185 190 195 200

19 20 20 21 22

11 12 13 14 14

4 4 5 6 7

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

200 210 220 230 240

210 220 230 240 250

23 25 26 28 29

15 17 18 20 21

8 9 11 12 14

0 2 3 5 6

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

250 260 270 280 290

260 270 280 290 300

31 32 34 35 37

23 24 26 27 29

15 17 18 20 21

8 9 11 12 14

0 2 3 5 6

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

300 310 320 330 340

310 320 330 340 350

38 40 41 43 44

30 32 33 35 36

23 24 26 27 29

15 17 18 20 21

8 9 11 12 14

0 1 3 4 6

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

MARRIED Persons—WEEKLY Payroll Period If the wages are – less At least But than

AS YOU

READ

Key Point Form W-4 The Form W-4 indicates whether the employee is single or married. It also shows the number of withholding allowances.

And the number of withholding allowances claimed is – 0

1

2

3

4

5

6

7

8

9

10

The amount of income tax to be withheld is – $0 125 130 135 140

$125 130 135 140 145

0 1 1 2 3

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

145 150 155 160 165

150 155 160 165 170

4 4 5 6 7

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

170 175 180 185 190

175 180 185 190 195

7 8 9 10 10

0 0 1 2 3

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

195 200 210 220 230

200 210 220 230 240

11 12 14 15 17

3 5 6 8 9

0 0 0 0 1

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

240 250 260 270 280

250 260 270 280 290

18 20 21 23 24

11 12 14 15 17

3 4 6 7 9

0 0 0 0 1

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

290 300 310 320 330

300 310 320 330 340

26 27 29 30 32

18 20 21 23 24

10 12 13 15 16

3 4 6 7 9

0 0 0 0 1

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

Figure 12– 4 Internal Revenue Service Tax Tables Section 2 Payroll Deductions

308-337_CH12_868829.indd 317

317

9/15/05 11:44:57 AM

AS YOU

READ

Key Point FICA Taxes Social security tax: 6.2% (.062) of annual gross earnings up to $90,000. Medicare tax: 1.45% (.0145) of total annual gross earnings.

The FICA taxes are exact taxes in that, unlike the federal income tax, they do not involve estimation and are not affected by allowances or marital status. Congress sets FICA tax rates and can change them at any time. Most employees are subject to FICA taxes, even those who are exempt from federal income taxes. The FICA tax rates are as follows: Social security tax Medicare tax Total FICA taxes

6.20% 1.45% 7.65%

The social security tax is deducted from the employee’s earnings until the maximum taxable earnings amount for the year is reached. This amount increases each year. For 2005, the maximum taxable earnings amount was $90,000. The maximum amount of social security tax that could be withheld from an employee in that year was $5,580.00 ($90,000
.062). There is no maximum taxable earnings amount for the Medicare tax. For example, Lisa Gus earns $93,000 per year as a manager at a CPA firm. She has $6,928.50 in FICA taxes withheld from her earnings:

Social security tax Medicare tax Total withheld

Earnings Subject to Tax
$90,000
93,000

Tax Rate .062  .0145 

Tax $5,580.00 1,348.50 $6,928.50

State and Local Income Taxes Most states and some cities tax the earnings of the people who live or work within their boundaries. Sometimes the withholdings are a percentage of gross earnings, like social security taxes. Amounts to be deducted also can be determined by tables similar to the ones for federal income tax.

Voluntary Deductions What Deductions Can an Employee Choose?

AS YOU

READ

Compare and Contrast Deductions What are the similarities between legally required deductions and voluntary deductions? What are the differences?

318

Most employers agree to deduct other amounts from their employees’ payroll check at the request of the employees. These deductions are withheld from each payroll check until the employee notifies the employer to stop. Voluntary employee deductions include union dues, health insurance payments, life insurance payments, pension and other retirement contributions, credit union deposits and payments, U.S. savings bonds, and charitable contributions. The 401(k) plan is a popular voluntary payroll deduction. The employee does not pay income tax on earnings contributed to the 401(k) plan until the money is withdrawn from the plan, usually after age 59½. In other words, taxable income is reduced by the amount of the contribution. Some employers make matching contributions to employees’ 401(k) accounts. Angelo Cappelli, a graphic artist, earns $644 each week and contributes $75 to his 401(k) account. Angelo will pay income tax on $569 ($644  $75). He will not pay income tax on his $75 contribution until he withdraws it from his 401(k) account.

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 318

9/15/05 11:45:33 AM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use an organizer like this one to list one major advantage and one major disadvantage, from the employee’s point of view, for each type of deduction. Add as many answer rows as needed.

,EGALLY2EQUIRED 4YPE

!DVANTAGE

6OLUNTARY $ISADVANTAGE

4YPE

!DVANTAGE

$ISADVANTAGE

Do the Math As the president of Creative Craft Memory Books, you have decided to add five new sales consultants to your sales force. You offer these sales consultants a gross salary of $23,000 each, but the consultants will not take home $23,000. Calculate the FICA taxes to be withheld from each consultant’s gross pay. What remains of their gross pay after you deduct FICA taxes?

Problem 12–2 Determining Taxes on Gross Earnings Information related to the just-completed pay period of MegaCom Computer Upgrades is provided in the following chart. Determine the amounts to be withheld from each employee’s gross earnings for FICA and income taxes. It is a weekly pay period, so use the tables on page 317 to determine the amount of federal income tax to be withheld. The state income tax is 2% of gross earnings. The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%. Use the format shown in your working papers. Employee Marital Status Cleary, Kevin S Halley, James S Hong, Kim S Jackson, Marvin M Sell, Richard M Total

Allowances 0 1 0 1 2

Gross Earnings $155.60 184.10 204.65 216.40 196.81 $957.56

Problem 12–3 Analyzing a Source Document Examine the following partially completed payroll check stub. The employee, Melanie Galvin, is single and claims one allowance. What amount should be deducted for: 1. Medicare 260 tax? Earnings Deductions 2. Social Period Net Ending Pay Security tax? 3. Federal 1/15/20-- 315.00 315.00 Income tax? Employee Pay Statement

Detach and retain this statement.

Social

Regular Overtime

Total

Security Tax

Med. Tax

Federal

State

Income

Income

Tax

Tax

Hosp. Ins.

Other

Total

Section 2 Payroll Deductions

308-337_CH12_868829.indd 319

319

9/15/05 11:45:35 AM

Payroll Records

SECTION 3

BEFORE YOU

In the previous sections you learned how to calculate gross earnings and deductions. Now you will learn how to compute net pay, prepare the payroll records for each period, and prepare payroll checks. Whether a business has many employees, like the Boeing Corporation, or a small staff, like a veterinarian’s office, it is essential that the payroll be prepared on time and accurately.

READ

Main Idea

Businesses must keep accurate payroll records to comply with federal and state laws.

Read to Learn… ➤ what a payroll register is

and how to prepare one. (p. 320) ➤ how employees receive their pay. (p. 322) ➤ how to maintain employees’ earnings records. (p. 323) ➤ how owners and managers use payroll information to make decisions. (p. 324)

Preparing the Payroll Register What Is the Purpose of a Payroll Register? Federal and state laws require businesses to keep accurate payroll records. To help meet these requirements, businesses use a payroll register. The payroll register is a form that summarizes information about employees’ earnings for each pay period. Let’s learn how to prepare payroll registers. Figure 12–5 shows the payroll register for Roadrunner. As you can see, the payroll register lists each employee’s I.D. number, name, marital status, and the number of allowances claimed. Refer to Figure 12–5 as you read the descriptions of the payroll register.

Key Terms

payroll register net pay direct deposit employee’s earnings record accumulated earnings

1 2

3

3 4 5

4 9 11 12 14

Cole, Amy Eng, James Kardos, Emily Phiffer, Alicia Terzian, Garo

TOTAL HOURS

2

ALLOW.

1

NAME

MAR. STATUS

EMPLOYEE NUMBER

PAY PERIOD ENDING June 30 RATE

M M S M S

1 0 0 2 1

31 41 36 42 39

7.60 7.20 6.75 7.20 6.75

4

PAYROLL REGISTER

20 --

235 288 243 288 263

60 00 00 00 25

OVERTIME

10 80 21 60

6

DATE OF PAYMENT June 30, 20--

EARNINGS REGULAR

5

DEDUCTIONS TOTAL

235 298 243 309 263

60 80 00 60 25

SOC. SEC. MEDICARE TAX TAX

14 18 15 19 16

61 53 07 20 32

3 4 3 4 3

42 33 52 49 81

FED. INC. TAX

STATE INC. TAX

9 00 26 00 29 00 12 00 24 00

4 5 4 6 5

71 98 86 19 27

HOSP. INS.

5 5 3 5 3

75 75 20 75 20

OTHER

(b)15

00

(b)10

00

TOTAL

37 60 70 47 62

49 59 65 63 60

NET PAY

198 238 172 261 200

11 21 35 97 65

CK. NO.

258 259 260 261 262

1 2 3 4 5 24

24

25

25

7

TOTALS 1,317 85

32 40 1,350 25

83 73

19 57 100 00

27 01

23 65

(b)25

00

278 96 1,071 29

Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.

Figure 12–5 Completed Payroll Register 320

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 320

9/15/05 11:45:40 AM

1. Total Hours Column. Regular and overtime hours from the employee’s time card are added together, and the total is entered in this column. 2. Rate Column. This column shows the employee’s current rate of pay, found on the employee’s earnings record. 3. Earnings Section. The earnings section is divided into three columns: • • •

regular overtime total earnings

To complete these columns, the payroll clerk multiplies the hours worked by the employee’s regular hourly rate or, when applicable, overtime hourly rate. Employee 4, Amy Cole, worked 31 hours. Her regular hourly rate is $7.60. Amy earned $235.60 (31
$7.60) for the week. Since there are no overtime hours, regular and total earnings are the same. Alicia Phiffer, employee 12, worked 2 overtime hours in addition to 40 regular hours. Her regular hourly rate is $7.20. Her overtime hourly rate is $10.80 ($7.20
1.5). Her regular earnings are $288.00 (40
$7.20) and her overtime earnings are $21.60 (2
$10.80). Her total earnings are $309.60 ($288.00  $21.60). 4. Deductions Section. The illustrated payroll register has seven deduction columns. The number of deduction columns, however, varies among businesses depending on the specific needs of each business. In the illustration, columns are provided for the deductions required by law: • • • •

social security tax Medicare tax federal income tax state income tax

Columns are also provided for voluntary deductions. Certain voluntary deductions taken by many employees on a regular basis will usually have their own columns, such as the column shown in the illustration for hospital insurance. Deductions taken less frequently are often placed in a column titled Other. In the illustration these deductions include credit union, union dues, savings bonds, and charitable contributions. Finally, a column is provided for the total deductions of each employee.

AS YOU

Look at the deductions for Garo Terzian, employee 14. Garo’s deductions include the taxes required by law. He also has two voluntary deductions, $3.20 for hospital insurance and $10.00, shown in the Other column, for U.S. Savings Bonds. The total deductions for Garo are $62.60 as shown in the Total column. 5. Net Pay Column. Net pay is the amount left after total deductions have been subtracted from gross earnings. The net pay for Garo Terzian is $200.65.

READ

In Your Own Words Net Pay “Net pay is the amount left after total deductions are subtracted.” What does this mean?

Section 3 Payroll Records

308-337_CH12_868829.indd 321

321

9/15/05 11:45:52 AM

CULTURAL Diversity Proper Names

Not all countries use the “first name-last name” style that is used in the United States. For example, in Spanish-speaking Latin America, the surname includes the mother and father’s last names. The father’s name comes first and is the only one used in conversation.

6. Check Number Column. Most employees are paid by check. The payroll check numbers are recorded in this column. 7. Column Totals. Each amount column is totaled, and the totals are entered on the last line of the payroll register. To ensure that there are no mathematical errors, subtract the Total Deductions column total from Total Earnings column total. The result should equal the Net Pay column total.

Paying Employees How Are Employees Paid? Once the accuracy of the payroll register has been verified, a payroll check is prepared for each employee. Most businesses pay their employees by check as a means of cash control. When a company has only a few employees, payroll checks are written from the company’s regular checking account. Companies with many employees have a separate checking account for payroll. When a separate payroll checking account is used, funds are transferred to this account each pay period. A check for the total net pay amount is written from the company’s regular checking account and deposited in the payroll checking account. Then individual payroll checks are issued to employees from the payroll account. The payroll register is the source of information for preparing the payroll checks. Along with a payroll check, each employee is given a written or printed explanation showing how the employee’s net pay is calculated. This explanation is provided on a stub attached to the payroll check. Figure 12–6 shows a typical payroll check and stub. Notice that for Emily Kardos, the amounts on the stub are the same as the amounts in the payroll register. After each payroll check has been written, the check number is recorded in the payroll register.

260

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230 Pay to the Order of

June 30

Date

Emily Kardos

63-947 670

20 -$ 172.35

One hundred seventy-two and 35/100

Dollars

❖ American National Bank

Maria Sanchez

SACRAMENTO, CALIFORNIA


067009471
3939 043 417 260

260

Employee Pay Statement Detach and retain this statement.

Period Ending

Earnings

Deductions Social

Regular Overtime

Total

Security Tax

6/30/20-- 243.00

243.00 15.07

Med. Tax

Federal

State

Income

Income

Tax

Tax

29.00

4.86

3.52

Hosp. Ins.

3.20

Net Pay

Other

Total

15.00

70.65 172.35

Figure 12–6 Completed Payroll Check and Stub 322

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 322

9/15/05 11:46:21 AM

Employees can be paid by check or by direct deposit. The employer makes a direct deposit of the net pay electronically in the employee’s personal bank account. No payroll check is prepared. The employee does, however, receive a printed record of the payroll calculation. Direct deposits are made through electronic funds transfer. With this system the employer informs the employee’s bank of the amount to be deposited.

The Employee’s Earnings Record What Is the Purpose of an Employee’s Earnings Record? In addition to the payroll register, an employer must also keep an employee’s earnings record for each employee. This record contains all of the payroll information related to an employee. Figure 12–7 on page 324 shows an example of an employee’s earnings record. The earnings record and payroll register have the same amount columns: • • • • •

three earnings columns four columns for deductions required by law additional columns for voluntary deductions (in this case, two columns) the Total column the Net Pay column

An additional column for the employee’s accumulated earnings is also provided. Accumulated earnings are the employee’s year-to-date gross earnings. That is the amount of the employee’s gross earnings from the beginning of the year through the end of the pay period just completed. The accumulated earnings for Emily Kardos as of June 30 are computed by adding her gross earnings for the pay period just completed to her accumulated earnings for the previous pay period as follows:

Gross Earnings Accumulated Earnings for Pay Period for Previous Just Completed  Pay Period   $4,178.60  $243.00

Accumulated Earnings for Pay Period Just Completed $4,421.60

Businesses keep employees’ earnings records on a quarterly basis. This makes it easier to complete government reports that are required each quarter. At the end of a quarter, the amount columns on each employee’s earnings record are totaled. The final amount in the Accumulated Earnings column is carried forward to the top of the employee’s earnings record for the next quarter. Figure 12–7 on page 324 illustrates how accumulated earnings amounts are carried forward. As you can see from this chapter, preparing payroll is time consuming and detail oriented. A mistake that is not promptly detected and corrected can mean hours of rework. To reduce simple mathematical errors and to improve productivity, many businesses use computers and special software to prepare payroll. In a computerized system, the computer • • • •

performs all payroll calculations, prepares and prints the payroll register, prints the payroll checks and stubs, and maintains the employees’ earnings records.

Section 3 Payroll Records

308-337_CH12_868829.indd 323

323

4/6/06 5:57:31 PM

This amount was carried forward from the previous quarter’s record.

EMPLOYEE'S EARNINGS RECORD FOR QUARTER ENDING

Kardos

Emily

Last Name

M

First

June 30, 20-EMPLOYEE NO.

11

S

MARITAL STATUS

ALLOWANCES

0

Initial

809 East Main Street

POSITION

Delivery Driver

Address

Sacramento, CA 94230 PAY PERIOD

EARNINGS

NO. ENDED REGULAR 1 2 3 4 5 6 7 8 9 10 11 12

4/07/-4/14/-4/21/-4/28/-5/05/-5/12/-5/19/-5/26/-6/02/-6/09/-6/16/-6/23/-6/30/--

13 QUARTERLY TOTALS

RATE OF PAY

199 205 270 222 229 162 256 270 204 212 189 216 243 2,880

13 88 00 75 50 00 50 00 19 63 00 00 00 58

OVERTIME

TOTAL

199 205 30 38 300 222 229 162 256 20 25 290 204 212 189 216 243 50 63 2,931

SOC. SEC. MEDICARE FED. INC. TAX TAX TAX

13 12 88 12 38 18 75 13 50 14 00 10 50 15 25 18 19 12 63 13 00 11 00 13 00 15 21 181

35 76 62 81 23 04 90 00 66 18 72 39 07 73

2 2 4 3 3 2 3 4 2 3 2 3 3 42

89 22 99 23 36 38 23 26 33 26 35 17 72 31 21 37 96 23 08 25 74 20 13 25 52 29 51 342

00 00 00 00 00 00 00 00 00 00 00 00 00 00

6.75

DEDUCTIONS STATE INC. TAX

3 4 6 4 4 3 5 5 4 4 3 4 4 58

98 12 01 46 59 24 13 81 08 25 78 32 86 63

SOC. SEC. NO.

HOSP. INS.

3 3 3 3 3 3 3 3 3 3 3 3 3 41

20 20 20 20 20 20 20 20 20 20 20 20 20 60

OTHER (B) 15

(B) 15

(B) 15

(B) 15

60

TOTAL

00 59 46 70 50 00 66 35 58 68 00 60 48 41 49 00 70 00 726

201-XX-XXXX ACCUMULATED EARNINGS

NET PAY

42 139 07 159 19 230 70 172 35 163 83 126 95 197 22 222 90 143 71 163 44 147 04 166 65 172 47 2,204

71 81 19 05 15 17 55 03 29 92 56 96 35 74

1,490 39 1,689 52 1,895 40 2,195 78 2,418 53 2,648 03 2,810 03 3,066 53 3,356 78 3,560 97 3,773 60 3,962 60 4,178 60 4,421 60

Other Deductions: B—U.S. Savings Bonds; C—Credit Union; UD—Union Dues; UW—United Way.

Figure 12–7 Employee’s Earnings Record

This amount will be carried forward to the next quarter’s record.

Managerial Implications for Payroll Accounting How Do Managers Use Payroll Information? Wages and salaries form a large part of a company’s expenses. Accurate and timely payroll records will assist management in planning and controlling these expenses. This information can be used in the following ways: • •

To determine whether overtime is justified or is a sign of possible inefficiency. To compare actual amounts to budgeted amounts to reveal any unplanned overtime and the reason for it.

This information helps managers investigate any amounts that were not expected or were unusual. After identifying any irregularities, managers can determine what caused them and how to resolve them. Management should also put internal controls in place to prevent errors and fraud. For example, payroll records should be audited carefully and payroll procedures should be evaluated periodically.

324

Chapter 12 Payroll Accounting

308-337_CH12_868829.indd 324

9/15/05 11:46:23 AM

Assessment

SECTION 3 AFTER YOU

READ

Reinforce the Main Idea Use a diagram like this one to show the similarities and differences between the payroll register and the employee’s earnings record.

Table Title

Table Title

Table Title

0AYROLL2EGISTER

Table Title

%MPLOYEES%ARNINGS2ECORD

Do the Math While reviewing the payroll records from the past two years for Sports Junction, an athletic supply store, you notice that the increasing payroll cost could be holding down overall company profits. The company’s payroll costs and revenue for the last eight quarters are provided. Use spreadsheet, accounting, or graphics software to create a line chart to compare the costs and revenue graphically. Analyze the chart, and make a recommendation to Sports Junction’s management about the salary levels. Do you recommend downsizing to increase profit?

Year 1 Qtr 2 Qtr 3 24,500 28,670 151,200 183,500

Qtr 1 24,000 136,700

Payroll Revenue

Qtr 4 35,280 234,000

Year 2 Qtr 2 Qtr 3 42,000 53,000 142,500 143,000

Qtr 1 34,000 143,000

Qtr 4 68,000 138,500

Problem 12–4 Preparing a Payroll Check Use the information on the payroll register for Heather’s Dance School and the form in the working papers to prepare a payroll check for Janice Burns for the week ending March 23, 20--. PAYROLL REGISTER

1

18 Burns, Janice

TOTAL HOURS

ALLOW.

NAME

MAR. STATUS

EMPLOYEE NUMBER

PAY PERIOD ENDING March 23

20 --

DATE OF PAYMENT March 23, 20--

EARNINGS

DEDUCTIONS

RATE

S 1 42 7.80

REGULAR

312 00

OVERTIME

23 40

TOTAL

335 40

SOC. SEC. MEDICARE TAX TAX

20 79

4 86

FED. INC. TAX

35 00

STATE INC. TAX

6 71

HOSP. INS.

4 10

OTHER

TOTAL

71 46

NET PAY

263 94 79

2

1 2

Section 3 Payroll Records

308-337_CH12_868829.indd 325

CK. NO.

325

9/15/05 2:23:41 PM

Summary

CH A P T ER 12 Key Concepts

1. Federal and state laws require employers to keep accurate records of all payroll information. Most employers use a payroll system to ensure that employees are paid on time and that their payroll checks and records are accurate. A well-designed payroll system achieves two goals: • To collect and process all information needed to prepare and issue payroll checks. • To generate payroll records needed for accounting purposes and for reporting to government agencies, management, and others. A computerized system does the following: • • • •

Performs all payroll calculations Prepares and prints a payroll register Prints the payroll checks and stubs Maintains employee’s earnings records

2. Gross pay is the amount an employee earns before deductions. It may be calculated by various methods including • • • • • •

salary, hourly wage, commission, salary plus commission or bonus, piece rate, or a combination of these methods.

Some employees who work more than 40 hours in a week are paid overtime. The overtime rate is usually 1½ times the regular rate of pay.

Regular Hourly Rate
$8.20

Overtime Hourly Rate 1.5  $12.30

3. Withholdings from gross earnings are called deductions. Some deductions are required by law. Other deductions are voluntary. Deductions Required By Law • federal income tax: determined by Form W-4 and tax tables • social security tax: 6.2% of total gross earnings up to $90,000 • Medicare tax: 1.45% of total gross earnings • state or local tax: determined by the state or city

326

Chapter 12 Summary

308-337_CH12_868829.indd 326

9/15/05 11:46:27 AM

Summary

CHAPT E R 1 2

Voluntary Deductions • union dues • insurance payments • charitable contributions • 401(k) plans • other retirement-related contributions 4. Net pay is the amount of money actually received by the employee.

Gross Pay  Total Payroll Deductions  Net Pay 5. A payroll register summarizes information for all employees in a single pay period. A pay period is the amount of time over which employees are paid (for example, once a week or twice a month). The payroll register includes • • • • • • •

total hours; rate of pay; regular earnings, overtime earnings, and total earnings; deductions; net pay; payroll check number; and totals.

6. Payroll funds can be distributed to employees by check or by direct deposit through electronic funds transfer. 7. The employee’s earnings record contains all information for a single employee. This record is kept quarterly to make it easier for the business to complete reports and forms required by the government. The earnings record has the same amount columns that appear on the payroll register plus an additional column for accumulated earnings. These are the employee’s earnings from the beginning of the year through the pay period just completed.

Key Terms accumulated earnings

(p. 323)

pay period

(p. 310)

commission

(p. 313)

payroll

(p. 310)

deduction

(p. 315)

payroll clerk

(p. 310)

direct deposit

(p. 323)

payroll register

(p. 320)

electronic badge readers

(p. 312)

piece rate

(p. 313)

employee’s earnings record

(p. 323)

salary

(p. 311)

401(k) plan

(p. 318)

time card

(p. 312)

gross earnings

(p. 311)

wage

(p. 312)

net pay

(p. 321)

withholding allowance

(p. 315)

overtime rate

(p. 313)

Chapter 12 Summary

308-337_CH12_868829.indd 327

327

4/6/06 5:57:37 PM

C H A P T ER 12 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

Payroll Records a. What are two goals of a payroll system? b. List five tasks that an effective payroll system performs. Gross Pay a. List and describe five employee bases or categories used to compute gross pay. b. Define overtime rate. Withholdings a. List the three federal taxes that businesses are required to withhold from employees’ wages. b. What three factors determine the amount of federal income tax withheld from an employee’s earnings each period? Net Pay a. How is net pay calculated? b. Does an individual’s net pay appear on the payroll register, the employee’s earnings record, or both? Payroll Register a. What information does the payroll register contain? b. Each page of the payroll register covers a period of time. What time period does it cover? Payroll Funds Distribution a. Explain how direct deposit of earnings works. b. How does an employee who receives a payroll check know how the amount of net pay was determined? Employee’s Earnings Record a. What is the purpose of the employee’s earnings record? b. What information does the Accumulated Earnings column on the employee’s earnings record contain?

Apply Key Terms You are the payroll clerk for Wild West Amusement Park. The new sales manager for the Western region, Will Klein, called and asked you to explain the items on his payroll check, dated January 31, 20--. He also asked you to explain any relevant company payroll procedures. Use these key terms in your written explanation. Use your imagination!

328

accumulated earnings commission deduction direct deposit electronic badge readers employee’s earnings record 401(k) plan gross earnings net pay

overtime rate pay period payroll payroll clerk payroll register piece rate salary time card wage withholding allowance

Chapter 12 Review and Activities

308-337_CH12_868829.indd 328

4/6/06 5:57:39 PM

Computerized Accounting

CHAPT E R 1 2

Preparing the Payroll Making the Transition from a Manual to a Computerized System Task Enter and maintain employee information; process payroll.

Manual Methods • Calculate employee gross earnings based on time cards or salary information. • Calculate required and voluntary deductions for each employee. • Complete the payroll register. • Prepare payroll checks. • Update employee earnings records. • Prepare journal entries. • Post journal entries to the general ledger.

Computerized Methods • Set up information related to employee earnings and deductions in employees’ records. • Based on rate, deduction, and withholding information for each employee, the software automatically calculates gross earnings and deductions. • The payroll checks, journal entries, and ledger postings are generated automatically.

Q&A Peachtree Question How do I process a payroll?

Answer 1. Select Payroll Entry from the Tasks menu. 2. Select the employee(s) to be paid. 3. Verify the pay amounts that are automatically entered for you. (These amounts are pulled from employee records stored in the system.) 4. Type the hours worked or the commission amounts. 5. Click Save. 6. To print payroll checks, click on Open, select checks to print and click OK. 7. Click Print.

QuickBooks Q & A QuickBooks Question How do I process a payroll?

Answer 1. 2. 3. 4. 5. 6. 7. 8.

Select Pay Employees from the Employees menu. Set the date of payment and end of payroll period. Select the employees to be paid and click Create. Verify the pay amounts that are automatically entered for you. (These amounts are pulled from employee records stored in the system.) Type the hours worked or the commission amounts. Click Create. To print payroll checks, click on File, select Print Forms, and then Paychecks. Click OK and then Print.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 12 Computerized Accounting

308-337_CH12_868829.indd 329

329

9/15/05 11:46:34 AM

Problems

C H A P T ER 12 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problems 12–5 1. Select the problem set for Wilderness Rentals (Prob. 12–5). 2. Rename the company and set the system date. 3. Enter John Gilmartin’s regular and overtime pay rates using the Employees/Sales Reps option in the Maintain menu. 4. Calculate the employees’ gross pay using the Payroll Entry option. 5. Print a Payroll Register report. 6. Proof your work. 7. Complete the Analyze activity. 8. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 12–5 1. Restore the Problem 12-5.QBB file. 2. Enter John Gilmartin’s regular and overtime pay rates using the Employee List option in the Employees menu. 3. Calculate the employee’s gross pay using the Pay Employees option in the Employees menu. 4. Print an Employee Earnings Summary report using the Employees & Payroll option in the Reports menu. 5. Proof your work. 6. Complete the Analyze activity. 7. Back up your work.

330

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 12–5 Calculating Gross Pay Wilderness Rentals pays employees either an hourly wage or a salary plus commission based on rental revenue. Hourly wage employees can earn overtime. The overtime rate is 1½ times the regular hourly rate of pay for hours worked over 40 in a week.

Instructions For each of the following employees, determine the total gross pay for the pay period. John Gilmartin • Earns an hourly wage of $6.80. • Worked 43 hours this week. Arlene Stone • Receives a salary of $250 per week plus a 3% commission on rental revenue. • Had rental revenue of $760 this week. Tom Driscoll • Earns an hourly wage of $7.35. • Worked 39 hours this week. Ann Ryan • Receives a salary of $185 per week plus 3% commission. • Had rental revenue of $1,235 this week.

Analyze

Identify the employee who had the lowest gross pay for the week.

Problem 12–6 Preparing a Payroll Register Hot Suds Car Wash has four employees. They are paid on a weekly basis with overtime paid for all hours worked over 40 in a week. The overtime rate is 1½ times the regular rate of pay. The payroll information follows. Employee

Employee Number

Rate per Hour

Marital Status

Allowances

Union Member

James Dumser Gail Job James Liptak Bruce Stern

108 112 102 109

$6.40 $7.22 $6.70 $7.80

Single Married Married Single

0 1 2 1

No Yes Yes Yes

During the week ending October 9, Dumser worked 39 hours, Job worked 41 hours, and Liptak and Stern each worked 36 hours.

Chapter 12 Problems

308-337_CH12_868829.indd 330

9/15/05 11:46:37 AM

Problems

CHAPT E R 1 2 SPREADSHEET SMART GUIDE

Instructions On the forms provided in your working papers: 1. Prepare a payroll register for the week ending October 9. The date of payment is also October 9. List employees in alphabetical order by last name. Use the tables on page 317 to determine the federal income tax withholding. The rate for the state income tax is 2%. Compute social security tax at 6.2% and Medicare tax at 1.45%. Union members pay weekly dues of $4.50. Both Gail Job and Bruce Stern had $6.75 deducted for health and hospital insurance. 2. Total the amount columns. Subtract total deductions from total earnings. Does the result equal the sum of the Net Pay column? If not, find and correct any error(s) on the payroll register.

Analyze

Step–by–Step Instructions: Problem 12–6 1. Select the spreadsheet template for Problem 12–6. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Identify the employee who had the highest amount withheld for federal income tax for the week.

Problem 12–7 Preparing Payroll Checks and Employee’s Earnings Records The payroll register for Kits & Pups Grooming is presented here and also appears in your working papers. PAYROLL REGISTER

3 4

TOTAL HOURS

2

NAME

Hurd, Mildred Montego, José Pilly, Amanda Steams, Margaret

ALLOW.

1

162 157 151 163

MAR. STATUS

EMPLOYEE NUMBER

PAY PERIOD ENDING October 17 RATE

S S M S

0 1 2 0

38 39 36 41

7.60 7.90 8.10 7.60

20 --

DATE OF PAYMENT October 17, 20--

EARNINGS REGULAR

288 308 291 304

80 10 60 00

OVERTIME

11 40

DEDUCTIONS TOTAL

288 308 291 315

80 10 60 40

SOC. SEC. MEDICARE TAX TAX

17 19 18 19

91 10 08 55

4 4 4 4

19 47 23 57

FED. INC. TAX

STATE INC. TAX

35 00 30 00 10 00 40 00

7 7 7 7

22 70 29 89

HOSP. INS.

5 10 7 60

OTHER

(B)

5 00

(B)

5 00

TOTAL

69 66 52 72

32 37 20 01

NET PAY

219 241 239 243

48 73 40 39

CK. NO. 1 2 3 4 24

24

25

25

TOTALS 1,192 50

11 40 1,203 90

74 64

17 46 115 00

30 10

12 70

(B)10

00

259 90

944 00

Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.

Instructions On the forms in your working papers: 1. Prepare a payroll check and stub for each employee. Where would you record the check numbers in the payroll register? 2. Record the payroll information in the employee’s earnings records for José Montego and Amanda Pilly.

Analyze

Identify the net pay for José Montego for this week.

Problem 12–8 Preparing the Payroll Outback Guide Service has six employees and pays each week. Hourly employees are paid overtime for all hours worked over 40 in a week. The overtime rate is 1½ times the regular rate of pay. Outback pays its employees by hourly rate, salary, or salary plus a 5% commission on total amount of sales.

SMART GUIDE Step–by–Step Instructions: Problem 12–7 1. Select the problem set for Kits & Pups Grooming (Prob. 12–7). 2. Rename the company and set the system date. 3. Print payroll checks using the Payroll Entry option. 4. Print a Payroll Register report and a Current Earnings report. 5. Complete the Analyze activity. 6. End the session.

CONTINUE Chapter 12 Problems

308-337_CH12_868829.indd 331

331

9/15/05 11:46:39 AM

Problems

C H A P T ER 12

Method of Computing Earnings

SMART GUIDE Step–by–Step Instructions: Problem 12–8 1. Select the problem set for Outback Guide Service (Prob. 12–8). 2. Rename the company and set the system date. 3. Record the payroll and print a check for each employee using the Payroll Entry option. 4. Print a Payroll Register report and a Current Earnings report. 5. Proof your work and make any needed corrections. 6. Complete the Analyze activity. 7. End the session.

TIP: Use the Windows calculator accessory if you need to make a calculation (e.g., commission).

Employee Cummings, Carol Dame, Ted Lengyel, Tom Robinson, Jean Usdavin, James Wong, Kim

Hourly Wage

Salary Plus Commission

Salary $270.00

$6.95

$160.00 plus 5% $140.00 plus 5%

$6.65

$140.00 plus 5%

Employee deductions include federal income taxes (use the tables on page 317), FICA taxes at 6.2% for social security and 1.45% for Medicare, state income taxes of 1.5%, and hospital insurance premiums of $5.43 for single employees and $9.37 for married employees. Also, Kim Wong and Tom Lengyel have $10.00 withheld each week to purchase U.S. savings bonds. During the pay period ending October 17, the sales were: Tom Lengyel $1,204.76, Jean Robinson $1,925.80, and Kim Wong $2,135.65. The hourly employees filled in the following time cards. 73 Ted Dame 093-XX-XXXX SOC. SEC. NO. 10/17/20-WEEK ENDING NO.

NAME

DAY

IN

OUT

IN

OUT

IN

92 NAME James Usdavin 087-XX-XXXX SOC. SEC. NO. TOTAL 10/17/20-WEEK ENDING NO.

OUT

M

8:58 12:03 12:55 5:09

T

8:55 11:55 1:00 4:00

DAY

W

9:30 12:10 1:04 3:30

M

8:55 12:06 1:01 5:35

Th

8:57 12:03 12:59 6:00

T

7:58 11:01 12:03 6:38

8:58 12:00 1:00 6:05

W

9:03 1:10 2:00 6:00

9:00 12:00

Th

7:59 11:55 1:10 4:51

F

9:01 12:06 1:05 3:47

S

9:00 12:03

F S S

TOTAL HOURS HOURS

RATE

IN

OUT

IN

OUT

IN

OUT

TOTAL

S AMOUNT TOTAL HOURS

REGULAR HOURS

OVERTIME TOTAL EARNINGS

RATE

AMOUNT

REGULAR OVERTIME

SIGNATURE

DATE

TOTAL EARNINGS

SIGNATURE

332

DATE

Chapter 12 Problems

308-337_CH12_868829.indd 332

9/15/05 11:46:40 AM

Problems

CHAPT E R 1 2

Instructions On the forms in your working papers: 1. Complete the time cards to the nearest quarter hour. 2. Prepare a payroll register for the week ending October 17. The date of payment is also October 17. Each employee’s number, marital status, and number of allowances claimed are listed on her or his employee’s earnings record. 3. Prepare a payroll check and stub for each employee. 4. Record the payroll information for each employee on her or his employee’s earnings record.

Analyze

Calculate the total amount deducted from employees’ gross pay for FICA taxes (social security and Medicare).

Problem 12–9 Preparing the Payroll Register SMART GUIDE

Showbiz Video has six employees who are paid weekly. The hourly employees are paid overtime for hours worked over 40 in a week, at a rate 1½ times their regular rate of pay. Employee information follows: Employee Mary Arcompora Barbara Fox John French Chris German David Izbecki Susan Tilbert

Employee Number 105 137 135 141 139 129

Marital Status Married Married Single Married Single Married

Step–by–Step Instructions: Problem 12–9

Allowances 2 1 1 4 0 1

Mary Arcompora, the store manager, NO. 141 Chris German is paid a salary of $300.00 per week NAME 449-XX-XXXX SOC. SEC. NO. plus 1% of all rental sales. Barbara Fox October 24, 20-WEEK ENDING and John French, salespeople, are paid IN OUT TOTAL DAY IN OUT IN OUT a salary of $200.00 per week plus a 6% M 8:05 12:03 1:00 5:05 commission on all rentals from the T 8:00 12:05 1:10 5:00 W “Oldies but Goodies” section. Chris 9:05 12:05 1:15 6:05 Th 8:30 11:55 1:15 6:00 German and David Izbecki, office F 8:00 12:00 1:00 6:15 workers, are paid an hourly wage of S $7.25. Susan Tilbert, a stock person, is S paid $6.40 per hour. TOTAL HOURS The payroll deductions include HOURS RATE AMOUNT federal income tax, social security tax of REGULAR 6.2%, Medicare tax of 1.45%, and state OVERTIME TOTAL EARNINGS income tax of 1.8%. Chris German and Susan Tilbert have $12.50 deducted each week for hospital insurance. During the week ending October 24, “Oldies but Goodies” rentals were $484.90 for Barbara Fox and $641.70 for John French. Total rental revenue for the week was $3,917.30.

1. Select the problem set for Showbiz Video (Prob. 12–9). 2. Rename the company and set the system date. 3. Record the payroll for each employee. 4. Print a Payroll Register report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

CONTINUE

Chapter 12 Problems

308-337_CH12_868829.indd 333

333

9/15/05 11:46:42 AM

Problems

C H A P T ER 12 Instructions

139 David Izbecki 461-XX-XXXX SOC. SEC. NO. October 24, 20-WEEK ENDING NO.

Prepare a payroll register in your working papers for the week ending October 24. Complete time cards to the nearest quarter of an hour. Use the federal income tax tables provided in the chapter.

NAME

DAY

IN

OUT

IN

OUT

M

8:00 12:05 1:00 5:00

IN

129 Susan Tilbert 401-XX-XXXX SOC. SEC. NO. TOTAL October 24, 20-WEEK ENDING NO.

NAME OUT

T

8:10 12:00 1:00 5:05

DAY

W

8:05 12:30 1:30 5:00

M

8:05 12:00 1:00 5:00

Th

8:00 12:00 1:00 5:10

T

8:10 12:00 1:15 5:00

8:05 12:05 1:05 3:30

W

8:30 12:00 1:00 6:00

Th

9:00 12:00 12:45 5:00

F

9:00 11:50

F S S

TOTAL HOURS HOURS

RATE

IN

OUT

IN

OUT

IN

OUT

TOTAL

S S AMOUNT TOTAL HOURS

REGULAR HOURS

OVERTIME TOTAL EARNINGS

RATE

AMOUNT

REGULAR OVERTIME

SIGNATURE

DATE

TOTAL EARNINGS

SIGNATURE

Analyze

SOURCE DOCUMENT PROBLEM Problem 12–10 Use the source documents in your working papers to complete this problem.

SMART GUIDE Step–by–Step Instructions: Problem 12–10 1. Select the problem set for Job Connect (Prob. 12–10). 2. Rename the company and set the system date. 3. Calculate the employees’ gross pay using the Payroll Entry option. 4. Print a Payroll Register report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

CHALLENGE PROBLEM

DATE

Compute the total net pay of all employees for the pay period.

Problem 12–10 Calculating Gross Earnings

Job Connect has seven employees, all of whom are paid weekly. For hourly wage employees, overtime is paid at 1½ times the regular rate of pay for hours worked over 40 in a week. Barbara Miller, the office manager, is paid a salary of $375.00 per week plus a bonus of 3% of all revenue over $6,000 per week. Lynn Austin, an office assistant, is paid a salary of $250.00 per week plus 5% of all telephone sales made in the office. Charlene Womack, the office secretary, is paid a salary of $230.00 per week. Susan Dilloway and Doris Franco, placement workers, are paid an hourly wage of $8.95. Pam Darrah is also a placement worker but is paid a commission of $35.00 for every job placement that she completes. David Facini, a part-time maintenance worker, is paid $6.75 per hour. For the week ending October 24, the office recorded the following payroll information. • Total office sales for the week were $8,420.00. • Susan Dilloway worked a total of 38½ hours. • Doris Franco worked a total of 41¼ hours. • Phone sales for the week were $1,375.00. • Pam Darrah made seven job placements. • David Facini worked a total of 23 hours.

Instructions Using the form provided in your working papers, calculate the gross earnings for the workers at Job Connect for the week ending October 24.

Analyze 334

Identify the employee who had the highest gross earnings.

Chapter 12 Problems

308-337_CH12_868829.indd 334

9/15/05 11:46:43 AM

Winning Competitive Events

CHAPTER 12

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Which form is considered the Withholding Allowance Certificate? a. W-2 b. W-4 c. 1040 d. 1099 e. none of these answers 2. Julie earns $18.50 per hour. She is paid overtime (time and one-half) for hours worked on Sunday. The first Sunday in June she worked 6 hours, giving her 46 hours for the week. What were her gross wages if total taxes withheld equaled 18%? a. $851.00 b. $1,069.67 c. $743.33 d. $906.50

Business Professionals of America MULTIPLE CHOICE 3. The Accumulated Earnings column of the employee earnings record a. shows net pay for the year. b. is the total earnings since the first of the year. c. shows net pay for one quarter. d. is the gross earnings for one quarter. 4. The Medicare tax is calculated by a. multiplying total earnings by the tax rate. b. multiplying net earnings by the tax rate. c. using a tax table. d. none of these 5. Jacqueline earns 18% commission on sales. Her sales for three months were: $2,870, $3,150, and $3,940. What was her total commission for the three months? a. $9,960.00 b. $1,792.08 Need More Help? c. $1,792.80 Go to glencoeaccounting.glencoe.com and d. $1,792.81 click on Student Center. Click on Winning Competitive Events and select Chapter 12. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

308-337_CH12_868829.indd 335

Chapter 12 Winning Competitive Events

335

10/13/05 10:23:20 PM

C H A P T ER 12 Critical Thinking

Payroll Accounting

CASE

Payroll: Financial Planning

a mattoefr

))

STUDY

ETHICS

$ )) Communicating ACCOUNTING

336

Real-World Applications and Connections

1. Define gross earnings. 2. Compare and contrast gross earnings and net pay. 3. Classify the following deductions as voluntary or required by law: county income tax, dental insurance payment, federal income tax, Medicare insurance payment, United Way donation, vision insurance payment. 4. Refer to the payroll register on page 320 and look at the entry for Amy Cole. What documents were used to calculate Amy’s net pay? 5. You need to create a new employee’s earnings record for an employee whose record has been lost. What information will you need, and where will you find it? 6. Justify the fact that a business can have different pay categories for employees. You are employed by Tallman Financial Advisors, owned by Marcy Tallman. Parker’s Framing hired Tallman to design its payroll system. Parker’s Framing will offer group health insurance to its employees and a retirement plan that will require contributions from both the employer and employees. Marcy has assigned the Parker’s Framing payroll project to you. INSTRUCTIONS 1. Draft a one-page report describing the payroll system you would design for Parker’s Framing. Include information on payroll forms, how hours worked will be collected, and payroll deductions. 2. Proofread the draft. Make sure there is a supporting paragraph for each main point. Also check for correct spelling, grammar, and punctuation. 3. Prepare the final document.

Payroll Information Payroll clerks have access to personal information about employees, such as rate of pay and marital status. Imagine that you are the payroll clerk for a clothing store like Gap. Your friend Janet, who also works at the store, is interested in one of the sales clerks. She wants you to find out how much money he makes and whether he is married. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Evaluating Direct Deposit A new co-worker has the choice of receiving a paycheck or using direct deposit. She asks for your recommendation. Write a paragraph explaining direct deposit and recommending whether or not your co-worker should use it.

Chapter 12 Real-World Applications and Connections

308-337_CH12_868829.indd 336

9/15/05 11:46:47 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 1 2

Integrity Employees who demonstrate integrity are able to make ethical decisions. ON THE JOB As a payroll clerk for Fun ‘n’ Games Amusement Park, you have access to confidential information about employees. Your friend and co-worker, Mark Arnold, asked you to divulge payroll information about Melissa Porter, who has the same job title he has. Melissa just received a pay raise. Mark did not. INSTRUCTIONS Write a few sentences explaining how you would respond to Mark’s request.

Offshoring Offshoring is the practice of U.S. companies using overseas providers for certain tasks. For example, technology companies like IBM and Microsoft have used programmers in India, mainly because overseas salaries are lower than U.S. salaries. Results have been mixed. Some companies report problems in employee turnover and communication. Others find that investors like the lower costs. INSTRUCTIONS Define offshoring in your own words and discuss its potential advantages and disadvantages for a business.

Your Part-Time Job Students often seek part-time jobs to earn some spending money. PERSONAL FINANCE ACTIVITY Ask your friends who have jobs how their hours worked are reported to the payroll accountant. Write a report discussing the different methods of reporting hours worked. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 12.

Analyzing Employee Productivity One measure of productivity is the average sales dollars generated by each employee. For example, in a company with total revenue of $1,480,000 and 20 employees, sales per employee are $74,000, calculated as follows: Total Revenue  Sales per Employee Number of Employees

Internet Project Calculating this measure from period to period How do people get paid? Visit or one part of a company to another can identify glencoeaccounting productivity changes. If sales per employee .glencoe.com and click change greatly, the owner needs to learn why. on Student Center. Click on INSTRUCTIONS Answer these questions using WebQuest and select Unit 3 to Roadrunner’s income statement on page 222. continue your Internet project. 1. If Roadrunner has two employees including the owner, what is the revenue per employee? 2. Suppose Roadrunner hires two more delivery people. The next month’s revenue increases to $5,400. How has the productivity per employee changed? glencoeaccounting.glencoe.com

308-337_CH12_868829.indd 337

Chapter 12 Real-World Applications and Connections

337

9/15/05 11:46:51 AM

CH A P T ER 13

Payroll Liabilities and Tax Records BEFORE YOU

READ

What You’ll Learn

Predict

1.

Record payroll transactions in the general journal.

2.

Describe the employer’s payroll taxes.

1. 2. 3. 4.

3.

Compute and complete payroll tax expense forms.

4.

Record the payment of tax liabilities in the general journal.

5.

Complete payroll tax reports.

6.

Define the accounting terms introduced in this chapter.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business EVALUATING PAYROLL COSTS

Verizon Wireless Can you imagine the paperwork involved in preparing paychecks for 51,000 workers at Verizon Wireless? What if

▲

Why It’s Important

many of these workers are temporary or contract employees?

Employers are legally required to make tax deposits on time and to report the earnings of each employee.

task. That’s why Verizon Wireless decided to find a better way

Gathering all these time sheets and job assignments is a huge to automate the process for managing its contract work force. The company now uses a Web-based payroll system called InSite. Requests and approvals for hiring contract employees, time sheets, and paychecks are handled online, faster and less costly than before. Now Verizon Wireless can spend more of its time and money fine-tuning new technologies like picture messaging, wireless Internet access, and 3-D games for its more than 43 million wireless phone customers.

What Do You Think? Why do you think a company like Verizon Wireless chooses to hire temporary or contract employees rather than full-time employees?

338

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 338

9/15/05 1:23:51 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Almost everyone must pay taxes. You learned about the taxes you pay on your earnings in the last chapter. Your employer also pays taxes on what you earn. That money must be paid to the appropriate government agency within a certain amount of time. You will learn about the employer’s payroll taxes in this chapter.

Personal Connection 1. Do you receive your paycheck in person, in the mail, or by direct deposit? 2. What do you imagine would happen if the accounting department failed to pay the taxes collected to the appropriate government agencies?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 13.

glencoeaccounting.glencoe.com

338-371_CH13_868829.indd 339

339

9/15/05 1:23:57 PM

SECTION 1

BEFORE YOU

READ

Main Idea

The release of cash for payroll is a transaction. It must be journalized and posted.

Read to Learn… ➤ how to analyze and

journalize the payroll transaction. (p. 340) ➤ how to post the payroll transaction. (p. 343)

Key Terms Salaries Expense

Journalizing and Posting the Payroll Employees, ranging from design engineers at Ford Motor Company to the waitresses at a neighborhood coffee shop, expect their payroll checks to arrive on time and to be accurate. You have learned that various amounts are withheld from employees’ earnings for taxes and voluntary deductions. When the payroll register is complete, the payroll entry is journalized and the amounts are posted to the general ledger. After the payroll has been prepared, a check is written to transfer the total net pay amount from the regular checking account of a business to its payroll checking account. The check is deposited in the payroll account, and all payroll checks for the period are written on the payroll account. The next step is to record the payment of the payroll in the accounting records.

Analyzing and Journalizing the Payroll How Do You Journalize Payroll?

AS YOU

READ

Instant Recall Total Earnings Gross Pay
Total Payroll Deductions Net Pay

340

Let’s analyze the effect of payroll on the employer’s accounting system. Each pay period, the business pays out a certain amount of money to its employees in the form of wages and salaries. Employee earnings are a normal operating expense of a business. The expense account often used to record employees’ earnings is called Salaries Expense . To increase the amount in Salaries Expense, the account is debited for the gross earnings for the pay period. The business withholds various deductions, such as income and FICA taxes, from gross earnings each pay period. Employees also request voluntary withholdings such as premiums for insurance coverage. The employer retains the amounts withheld until it is time to pay the appropriate government agencies and businesses. The amounts withheld but not yet paid are liabilities of the business. Remember, a liability is an amount owed by a business.

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 340

9/15/05 1:24:39 PM

Each type of payroll liability is recorded in a separate account. Type of Deduction

Ledger Account

Federal income tax

Employees’ Federal

Social security tax

Social Security Tax Payable

Medicare tax

Medicare Tax Payable

Hospital insurance premiums

Hospital Insurance

Income Tax Payable

Premiums Payable

AS YOU

READ

In Your Own Words Salaries Expense “Employee earnings are a normal operating expense of the business.” What does this mean?

Depending on the business, it is possible that several different types of deductions are recorded in the Other Deductions column of the payroll register. If so, the total for each type of deduction is credited to the appropriate liability account. Refer to the Roadrunner Delivery Service payroll register shown in Figure 12–5 on page 320. The deductions that may appear in the Other Deductions column each have an account in Roadrunner’s general ledger: • • • •

U.S. Savings Bonds Payable Credit Union Payable Union Dues Payable United Way Payable

The credit part of the payroll journal entry is made up of several items. The largest item is for net pay. Net pay is the amount actually paid out in cash by the employer to the employees. Cash in Bank is credited for total net pay. The difference between gross earnings and net pay equals the employer’s payroll liabilities. Each payroll liability account is separately credited for the total amount shown on the payroll register.

B u s i n e s s Tr a n s a c t i o n Roadrunner’s payroll register in Figure 12–5 on page 320 is the source document for the payroll journal entry. ANALYSIS

Identify

Classify


/

1. The accounts Salaries Expense, Employees’ Federal Income Tax Payable, Employees’ State Income Tax Payable, Social Security Tax Payable, Medicare Tax Payable, Hospital Insurance Premiums Payable, U.S. Savings Bonds Payable, and Cash in Bank are affected. 2. Salaries Expense is an expense account. Employees’ Federal Income Tax Payable, Employees’ State Income Tax Payable, Social Security Tax Payable, Medicare Tax Payable, Hospital Insurance Premiums Payable, and U.S. Savings Bonds Payable are liability accounts. Cash in Bank is an asset account. 3. Salaries Expense is increased by $1,350.25; Employees’ Federal Income Tax Payable is increased by $100.00; Employees’ State Income Tax Payable is increased by $27.01; Social Security Tax Payable is increased by $83.73; Medicare Tax Payable is increased by $19.57; Hospital Insurance Premiums Payable is increased by $23.65; U.S. Savings Bonds Payable is increased by $25.00; Cash in Bank is decreased by $1,071.29

Section 1 Journalizing and Posting the Payroll

338-371_CH13_868829.indd 341

341

9/15/05 1:26:39 PM

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Salaries Expense for $1,350.25. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $1,071.29. Increases in liability accounts are recorded as credits. Credit Employees’ Federal Income Tax Payable for $100; Employees’ State Income Tax Payable for $27.01; Social Security Tax Payable for $83.73; Medicare Tax Payable for $19.57; Hospital Insurance Premiums Payable for $23.65; U.S. Savings Bonds Payable for $25.00.

T ACCOUNTS

6.

Employees’ Federal Income Tax Payable

Salaries Expense Debit  1,350.25

Credit


Employees’ State Income Tax Payable Debit


Credit  27.01

Social Security Tax Payable

Hospital Insurance Premiums Payable

Credit  19.57

JOURNAL ENTRY

7.

Cash in Bank Credit
1,071.29

Debit 

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10

DESCRIPTION

20-June 30 Salaries Expense Emplys’ Fed. Inc. Tax Pay. Emplys’ State Inc. Tax Pay. Social Sec. Tax Pay. Medicare Tax Pay. Hosp. Ins. Premiums Pay. U.S. Savings Bonds Pay. Cash in Bank Pay. Reg. 6/30—Ck 186

11

342

Credit  25.00

Credit  23.65

Debit


U.S. Savings Bonds Payable Debit


Credit  83.73

Debit


Medicare Tax Payable Debit


Credit  100.00

Debit


POST. REF.

PAGE DEBIT

29

CREDIT 1

1 3 5 0 25

2

1 0 0 00 2 7 01 8 3 73 1 9 57 2 3 65 2 5 00 1 0 7 1 29

3 4 5 6 7 8 9 10 11

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 342

9/15/05 1:26:42 PM

The payroll expense is $1,350.25. The employees receive $1,071.29 in cash (net pay). Later the business will pay the federal government $203.30 ($100.00 federal income tax, $83.73 social security tax, and $19.57 Medicare tax). The business will also pay the state $27.01 for state income tax. A check for $23.65 will be written to the insurance company for hospital insurance premiums. Finally, a check for $25 will be sent to the federal government to purchase savings bonds. These liabilities are the result of deductions that were taken from employees’ earnings. In the next section, you will learn about the payroll tax liabilities of the employer.

Posting the Payroll Entry How Do You Post the Payroll?

AS YOU

READ

Key Point The Payroll Entry Gross pay: debited to Salaries Expense Payroll deductions: credited to liability accounts Net pay: credited to Cash in Bank

Figure 13–1 shows the general journal entry and the individual ledger accounts after posting.

GENERAL JOURNAL DATE 1 2

20-June

3 4 5 6 7 8 9 10

POST. REF.

DESCRIPTION

29

PAGE DEBIT

CREDIT 1

30 Salaries Expense Employees’ Fed. Inc. Tax Pay. Employees’ State Inc. Tax Pay. Social Security Tax Pay. Medicare Tax Pay. Hosp. Ins. Premiums Pay. U.S. Savings Bonds Pay. Cash in Bank Payroll Reg. 6/30—Ck. 186

514 210 215 220 225 230 235 101

1 3 5 0 25

2

100 27 83 19 23 25 1071

00 01 73 57 65 00 29

3 4 5 6 7 8 9 10

11

11

ACCOUNT Salaries Expense DATE

BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30

ACCOUNT NO. 514 DEBIT

CREDIT

✓

ACCOUNT Employees’ Federal Income Tax Payable DATE

POST. DESCRIPTION REF.

20-June 23 Balance 30

ACCOUNT NO. 210 BALANCE

DEBIT

CREDIT

DEBIT

✓ G29

CREDIT

34 6 8 3 10 36 0 3 3 35

1 3 5 0 25

G29

DEBIT

1 0 0 00

CREDIT

2 9 3 18 3 9 3 18

CONTINUE

Figure 13–1 Posting the Payroll Entry to the General Ledger

Section 1 Journalizing and Posting the Payroll

338-371_CH13_868829.indd 343

343

9/15/05 1:26:47 PM

ACCOUNT Employees’ State Income Tax Payable DATE

BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30

ACCOUNT NO. 215

DEBIT

CREDIT

DEBIT

✓

3 2 1 12 3 4 8 13

2 7 01

G29

ACCOUNT Social Security Tax Payable DATE

CREDIT

BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30

ACCOUNT NO. 220

DEBIT

CREDIT

DEBIT

2 5 0 35 3 3 4 08

✓ 8 3 73

G29

ACCOUNT Medicare Tax Payable DATE

CREDIT

BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30

ACCOUNT NO. 225

DEBIT

CREDIT

✓ G29

DEBIT

5 8 63 7 8 20

1 9 57

ACCOUNT Hospital Insurance Premiums Payable DATE

ACCOUNT NO. 230 BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30

CREDIT

DEBIT

CREDIT

✓ G29

DEBIT

POST. DESCRIPTION REF.

20-June 23 Balance 30

ACCOUNT NO. 235 BALANCE

DEBIT

✓ G29

CREDIT

POST. DESCRIPTION REF.

20-June 23 Balance 30

✓ G29

DEBIT

CREDIT

7 5 00 1 0 0 00

2 5 00

ACCOUNT Cash in Bank DATE

4 73 2 8 38

2 3 65

ACCOUNT U.S. Savings Bonds Payable DATE

CREDIT

ACCOUNT NO. 101 BALANCE DEBIT

CREDIT

1 0 7 1 29

DEBIT

CREDIT

19 6 1 0 30 18 5 3 9 01

Figure 13–1 Posting the Payroll Entry to the General Ledger (continued)

344

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 344

9/15/05 1:26:50 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use an organizer like this one to express the payroll journal entry as an equation. Use broad account categories. (For example, use liabilities instead of listing all possible accounts.) Draw arrows (↑↓) in each box to show whether the account category increases or decreases.





Do the Math You are the payroll clerk for Queen City Motors. As you review the payroll records, you notice that two employees are nearing the $90,000 limit for social security tax. As commissiononly sales employees, Marcie Laliberte and Kevin Hogan have earned $87,200 and $88,700, respectively. 1. How much more must Marcie and Kevin earn in commission to reach the social security tax limit? 2. If Marcie and Kevin are paid 7% commission on each sale, how much more in sales must each make to reach the social security tax limit?

Problem 13–1 Determining Payroll Amounts SweepIt Cleaning Service reported the following amounts for the week ending November 4. The total amount earned by all employees is $2,193.40. The amount withheld for federal income tax is $263.00. Social security tax is $136.00, and Medicare tax is $31.80. Three of the employees each have $11.25 deducted for hospital insurance. The amount withheld for state income tax is $38.70.

Instructions Answer the following questions concerning the November 4 payroll for SweepIt Cleaning Service. 1. 2. 3. 4. 5.

What amount is recorded in the Salaries Expense account? What amount is recorded in the Medicare Tax Payable account? What is the total amount of liabilities for the weekly payroll? What amount is entered in the Hospital Insurance Premiums Payable account? What amount is recorded as a credit for the Cash in Bank account?

Section 1 Journalizing and Posting the Payroll

338-371_CH13_868829.indd 345

345

9/15/05 1:26:53 PM

SECTION 2

BEFORE YOU

Employer’s Payroll Taxes

READ

Main Idea

Employers must pay taxes in addition to the amounts withheld from their employees. This is an expense for the business.

Computing Payroll Tax Expenses Which Payroll Taxes Are Paid by the Employer?

Read to Learn…

In addition to withholding taxes from employees’ wages, the employer pays taxes on these wages. The employer’s taxes, considered operating expenses of the business, consist of the employer’s FICA taxes, the federal unemployment tax, and the state unemployment tax.

➤ how to compute payroll tax

expense. (p. 346) ➤ how to journalize payroll tax

expense. (p. 347) ➤ how to post payroll tax expense.

(p. 349)

Key Terms

In Section 1 you learned how to journalize and post the payroll entry. This entry, in part, records taxes that employees are required to pay on their earnings. Your local florist, employing designers, delivery workers, and sales clerks, must also pay taxes on these workers’ earnings. These amounts need to be calculated, journalized, and posted.

The Employer’s FICA Taxes Under the Federal Insurance Contributions Act, both the employee and the employer pay FICA taxes. As you recall, the employer withholds a percentage of gross earnings for social security and Medicare taxes. In addition, the employer pays FICA taxes using the same percentage of gross earnings. Recall that the current rates are 6.2% for social security tax and 1.45% for Medicare tax. The employer and the employee pay social security tax on gross earnings up to the maximum taxable limit per employee ($90,000 in 2005). The employer and the employee pay Medicare tax on all gross earnings; there is no maximum taxable limit. The payroll clerk checks the accumulated earnings on each employee’s earnings record to determine whether that employee has reached the maximum taxable amount. When an employee reaches the limit, the social security tax is no longer computed. In determining social security tax and Medicare tax for both employee and employer, it makes no difference whether an employee is full-time, parttime, temporary, or permanent. A full-time adult employee and a student employed part-time only for the summer are subject to the same taxes. At Roadrunner Delivery Service for the week ending June 30, the employees’ total social security taxes are $83.73 and total Medicare taxes are $19.57. The employer’s taxes on the total gross earnings are $83.72 (6.2% of $1,350.25) and $19.58 (1.45% of $1,350.25), respectively. Notice that the social security tax for the employees ($83.73) and the employer ($83.72) do

Federal Unemployment Tax Act (FUTA) State Unemployment Tax Act (SUTA) unemployment taxes Payroll Tax Expense

AS YOU

READ

Key Point FICA Taxes Both employees and employers pay the same amount of FICA taxes.

346

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 346

9/15/05 1:26:55 PM

not match. The same situation exists for the Medicare tax. This is because the employer’s tax is calculated on the total gross earnings ($1,350.25). The employees’ taxes are calculated on each employee’s gross earnings and the individual tax amounts are totaled. This may result in small differences between the employees’ and employer’s taxes.

Federal and State Unemployment Taxes Two unemployment laws, the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) , require employers to pay unemployment taxes. Unemployment taxes are collected to provide funds for workers who are temporarily unemployed. Unemployment taxes are based on a percentage of the employees’ gross earnings. The employer pays both federal and state unemployment taxes. The maximum federal unemployment tax is 6.2% on the first $7,000 of an employee’s annual wages. State unemployment tax rates and maximum taxable amounts vary among states. Employers may deduct up to 5.4% of the state unemployment taxes from federal unemployment taxes. Most employers, therefore, pay a federal tax of .8% (6.2%
5.4%) of taxable gross earnings. In a few states, employees are also required to pay unemployment taxes. The percentage amount varies among these states. For Roadrunner, since none of the employees has reached the maximum taxable amount, the federal unemployment tax for the week ended June 30 is $10.80 ($1,350.25  .008, or .8%). The state unemployment tax is $72.91 ($1,350.25  .054, or 5.4%).

Journalizing the Employer Payroll Taxes How Do You Journalize Payroll Tax Expense? The employer’s payroll taxes are business expenses recorded in the Payroll Tax Expense account. Until paid, the employer’s payroll taxes are liabilities of the business. Use the Social Security Tax Payable and the Medicare Tax Payable accounts to record both the employees’ and the employer’s FICA taxes. Record the employer’s unemployment taxes in the Federal Unemployment Tax Payable and State Unemployment Tax Payable accounts. In the next business transaction, we will analyze the accounts affected when an employer pays its payroll taxes. This entry takes place in each payroll period.

AS YOU

READ

It’s Not What It Seems Unemployment Taxes Unemployment taxes are not paid by the people who might become unemployed. These taxes are paid by employers.

Section 2 Employer’s Payroll Taxes

338-371_CH13_868829.indd 347

347

9/15/05 1:26:58 PM

B u s i n e s s Tr a n s a c t i o n Roadrunner’s payroll register in Figure 12–5 on page 320 is the source document for the payroll tax journal entry. ANALYSIS

Identify

Classify


/

1. The accounts Payroll Tax Expense, Social Security Tax Payable, Medicare Tax Payable, State Unemployment Tax Payable, and Federal Unemployment Tax Payable are affected. 2. Payroll Tax Expense is an expense account. Social Security Tax Payable, Medicare Tax Payable, State Unemployment Tax Payable, and Federal Unemployment Tax Payable are liability accounts. 3. Payroll Tax Expense is increased by $187.01; Social Security Tax Payable is increased by $83.72; Medicare Tax Payable is increased by $19.58; State Unemployment Tax Payable is increased by $72.91; Federal Unemployment Tax Payable is increased by $10.80.

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Payroll Tax Expense for $187.01. 5. Increases in liability accounts are recorded as credits. Credit Social Security Tax Payable for $83.72; Medicare Tax Payable for $19.58; State Unemployment Tax Payable for $72.91; Federal Unemployment Tax Payable for $10.80.

T ACCOUNTS

6.

Social Security Tax Payable

Payroll Tax Expense Debit  187.01

Credit


State Unemployment Tax Payable

Medicare Tax Payable Debit


Credit  83.72

Debit


Credit  19.58

Credit  72.91

Debit


Federal Unemployment Tax Payable Debit


JOURNAL ENTRY

7.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7

348

Credit  10.80

DESCRIPTION

20-June 30 Payroll Tax Expense Social Security Tax Pay. Medicare Tax Pay. State Unemplymnt. Tax Pay. Fed. Unemplymnt. Tax Pay. Payroll Reg. 6/30

POST. REF.

PAGE DEBIT

30

CREDIT 1

1 8 7 01

2

8 3 72 1 9 58 7 2 91 1 0 80

3 4 5 6 7

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 348

9/15/05 1:27:06 PM

Posting Payroll Taxes to the General Ledger

CULTURAL Diversity Communication

How Do You Post Payroll Tax Expense? Figure 13–2 shows the individual ledger accounts after posting the payroll taxes entry. Notice that the Social Security Tax Payable and the Medicare Tax Payable accounts have two entries for the June 30 payroll. The first entry is the amount of taxes withheld from the employees’ earnings. The second entry is the amount of taxes paid by the employer. ACCOUNT Payroll Tax Expense

BALANCE

POST. DESCRIPTION REF.

DATE

20-June 23 Balance 30

ACCOUNT NO. 520 DEBIT

✓ G30

CREDIT

DEBIT

4 7 8 4 10 4 9 7 1 11

1 8 7 01

ACCOUNT Social Security Tax Payable

20-June 23 Balance 30 30

ACCOUNT NO. 220 BALANCE

POST. DESCRIPTION REF.

DATE

DEBIT

CREDIT

✓ G29 G30

DEBIT

2 5 0 35 3 3 4 08 4 1 7 80 ACCOUNT NO. 225 BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30 30

DEBIT

CREDIT

✓ G29 G30

DEBIT

POST. DESCRIPTION REF.

20-June 23 Balance 30

5 8 63 7 8 20 9 7 78

ACCOUNT NO. 240 BALANCE

DEBIT

CREDIT

✓ G30

DEBIT

POST. DESCRIPTION REF.

20-June 23 Balance 30

✓ G30

CREDIT

7 9 3 41 8 6 6 32

7 2 91

ACCOUNT Federal Unemployment Tax Payable DATE

CREDIT

1 9 57 1 9 58

ACCOUNT State Unemployment Tax Payable DATE

CREDIT

8 3 73 8 3 72

ACCOUNT Medicare Tax Payable DATE

CREDIT

“Yes” does not mean “yes” in every culture. In Saudi Arabia “yes” usually means “possibly.” When the Japanese say “yes,” it can mean “Yes, I hear you,” not “Yes, I agree with you.” In Japan people prefer not to say “no” because being negative is impolite and disrupts harmony.

ACCOUNT NO. 245 BALANCE

DEBIT

CREDIT

1 0 80

DEBIT

CREDIT

1 1 8 80 1 2 9 60

Figure 13–2 General Ledger Accounts after Posting the Payroll Taxes Entry Section 2 Employer’s Payroll Taxes

338-371_CH13_868829.indd 349

349

9/15/05 1:27:06 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Employer payroll taxes are paid at different rates. Use a chart like this one to show the rates of the employer payroll taxes.

%MPLOYER0AYROLL4AX2ATES 4AX

0ERCENTOF4OTAL%ARNINGS

%ARNINGS,IMIT

3OCIALSECURITY &EDERALUNEMPLOYMENT -EDICARE 3TATEUNEMPLOYMENT

Do the Math Calculate the employer’s federal unemployment tax rate for each of the following states: State State A State B State C State D State E

State Unemployment Tax Rate 1.5% 3.0% 4.5% 5.4% 6.0%

Problem 13–2 Calculating Employer’s Payroll Taxes For the week ending June 30, EZ Copy Center’s payroll has total gross earnings of $4,836.60. Calculate the employer’s payroll taxes. Use the following percentages: Social security tax Medicare tax

6.2% 1.45%

Federal unemployment tax State unemployment tax

0.8% 5.4%

Problem 13–3 Identifying Entries for Payroll Liabilities The following list includes several payroll-related items used in preparing the weekly payroll for Outdoor Adventures. These items are included in either the entry to record the payroll or the entry to record the employer’s payroll taxes. Employees’ federal income tax Employer’s social security tax U.S. savings bonds Employer’s Medicare tax Federal unemployment tax

Employees’ state income tax Union dues Employees’ social security tax State unemployment tax Employees’ Medicare tax

Instructions Use the form provided in your working papers. Place a check mark in the column that describes the entry in which the item is recorded: • • 350

entry to record the payroll entry to record the employer’s payroll taxes.

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 350

9/15/05 1:27:09 PM

Tax Liability Payments and Tax Reports

SECTION 3

After journalizing and posting the payroll entries, a business pays the amounts owed to government agencies and other institutions.

Paying the Payroll Tax Liabilities

Employers make tax deposits and send payroll reports to the government.

Payroll liabilities are paid at regular intervals.

FICA and Federal Income Taxes A business makes one payment combining (1) social security and Medicare taxes (for both employees and employer), and (2) employees’ federal income taxes withheld. It makes the payment at an authorized financial institution or Federal Reserve Bank. Most small businesses, like Roadrunner, make this payment monthly. It is due by the 15th day of the month following the payroll month. Payment for the month ending June 30 is due by July 15. Larger businesses make the payment every two weeks. Many small businesses prepare and send a Form 8109 with the check. The Form 8109, or Federal Tax Deposit Coupon, identifies the type of tax and the tax period. Notice the ovals on the right side of Form 8109 in Figure 13–3. The 941 oval indicates FICA and federal income taxes. The 2nd Quarter oval indicates the period ending June 30.

TAX YEAR MONTH

06

,

EMPLOYER IDENTIFICATION NUMBER BANK NAME/ DATE STAMP

9 0 8 .7 6 ,

31 8042398 IRS USE ONLY

ROADRUNNER DELIVERY SERVICE 155 GATEWAY BLVD. SACRAMENTO CA 94230

Darken only one

Darken only one

TYPE OF TAX

TAX PERIOD

941

945

1st Quarter

990C

1120

2nd Quarter

943

990-T

3rd Quarter

720

990PF

4th Quarter

CT-1

1042

940

READ

Main Idea

How and When Do Employers Pay Their Liabilities?

AMOUNT OF DEPOSIT (Do NOT type, please print.) DOLLARS CENTS

BEFORE YOU

Read to Learn… ➤ how employers send

payroll tax payments to the government. (p. 351) ➤ how employers report payroll information to the government. (p. 357)

Key Terms

Form 8109 Electronic Federal Tax Payment System (EFTPS) Form W-2 Form W-3 Form 941 Form 940

35

FOR BANK USE IN MICR ENCODING

Federal Tax Deposit Coupon

Form 8109

Figure 13–3 Federal Tax Deposit Coupon (Form 8109) for FICA and Federal Income Taxes

The Electronic Federal Tax Payment System (EFTPS) is used by larger businesses to make deposits. Eventually even small businesses will use EFTPS.

B u s i n e s s Tr a n s a c t i o n Roadrunner pays $908.76 payroll tax liabilities July 15 including $393.18 employees’ federal income taxes, $417.80 social security taxes, and $97.78 Medicare taxes (refer to ledger accounts in Figures 13–1 and 13–2).

Section 3 Tax Liability Payments and Tax Reports

338-371_CH13_868829.indd 351

351

9/15/05 1:27:11 PM

ANALYSIS

Identify Classify


/

1. The accounts Employees’ Federal Income Tax Payable, Social Security Tax Payable, Medicare Tax Payable, and Cash in Bank are affected. 2. Employees’ Federal Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable are liability accounts. Cash in Bank is an asset account. 3. Employees’ Federal Income Tax Payable is decreased by $393.18; Social Security Tax Payable is decreased by $417.80; Medicare Tax Payable is decreased by $97.78; Cash in Bank is decreased by $908.76.

DEBIT-CREDIT RULE

4. Decreases in liability accounts are recorded as debits. Debit Employees’ Federal Income Tax Payable for $393.18; Social Security Tax Payable for $417.80; Medicare Tax Payable for $97.78. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $908.76.

T ACCOUNTS

6.

Employees’ Federal Income Tax Payable Debit
393.18

Social Security Tax Payable

Credit 

Debit
417.80

Medicare Tax Payable Debit
97.78

JOURNAL ENTRY

7.

Credit 

Cash in Bank

Credit 

Credit
908.76

Debit 

GENERAL JOURNAL DATE 1 2 3 4 5 6

DESCRIPTION

POST. REF.

20-July 15 Emplys’ Fed. Inc. Tax Pay. Social Security Tax Pay. Medicare Tax Pay. Cash in Bank Check 208

PAGE DEBIT

31

CREDIT 1

3 9 3 18 4 1 7 80 9 7 78

2 3 4

9 0 8 76

5 6

State and Local Income Taxes At regular intervals businesses pay the amounts withheld for state and local income taxes. Each state and local government determines how and when the payments are made and what reports are filed.

B u s i n e s s Tr a n s a c t i o n Roadrunner pays $348.13 to the state. This is the amount of state income tax withheld from employees’ earnings, as indicated in the Employees’ State Income Tax Payable account shown in Figure 13–1.

352

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 352

9/15/05 1:27:14 PM

ANALYSIS

Identify Classify
/

1. The accounts Employees’ State Income Tax Payable and Cash in Bank are affected. 2. Employees’ State Income Tax Payable is a liability account. Cash in Bank is an asset account. 3. Employees’ State Income Tax Payable is decreased by $348.13. Cash in Bank is decreased by $348.13.

DEBIT-CREDIT RULE

4. Decreases in liabilities are debits. Debit Employees’ State Income Tax Payable for $348.13. 5. Decreases in assets are credits. Credit Cash in Bank for $348.13.

T ACCOUNTS

6.

Employees’ State Income Tax Payable Debit
348.13

JOURNAL ENTRY

7.

Cash in Bank

Credit 

Credit
348.13

Debit 

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

POST. REF.

20-July 15 Emplys’ State Inc. Tax Pay. Cash in Bank Check 209

PAGE DEBIT

32

CREDIT 1

3 4 8 13

2

3 4 8 13

3 4

Federal Unemployment Taxes Most businesses pay the FUTA tax quarterly. If a business has accumulated FUTA taxes of less than $100, only one annual payment is necessary.

B u s i n e s s Tr a n s a c t i o n Roadrunner pays $129.60 for FUTA taxes. This is the balance of the Federal Unemployment Tax Payable account shown in Figure 13–2. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

1. Federal Unemployment Tax Payable and Cash in Bank are affected. 2. Federal Unemployment Tax Payable is a liability account. Cash in Bank is an asset account. 3. Federal Unemployment Tax Payable is decreased by $129.60. Cash in Bank is decreased by $129.60.

4. Decreases in liabilities are debits. Debit Federal Unemployment Tax Payable for $129.60. 5. Decreases in assets are credits. Credit Cash in Bank for $129.60.

Section 3 Tax Liability Payments and Tax Reports

338-371_CH13_868829.indd 353

353

9/15/05 1:27:14 PM

6.

T ACCOUNTS

Federal Unemployment Tax Payable Debit
129.60

JOURNAL ENTRY

Cash in Bank

7.

Credit
129.60

Debit 

Credit 

GENERAL JOURNAL DATE 1 2 3 4

POST. REF.

DESCRIPTION

33

PAGE DEBIT

20-July 15 Fed. Unemployment Tax Pay. Cash in Bank Check 210

CREDIT 1

1 2 9 60

2

1 2 9 60

3 4

A Form 8109 is prepared and sent with the check for the FUTA tax. To indicate that FUTA taxes are being paid, the 940 oval is filled in. Figure 13–4 shows the Form 8109 that Roadrunner sends with the FUTA payment. AMOUNT OF DEPOSIT (Do NOT type, please print.) DOLLARS CENTS TAX YEAR MONTH

06

,

EMPLOYER IDENTIFICATION NUMBER BANK NAME/ DATE STAMP

1 2 9 .6 0 ,

31 8042398 IRS USE ONLY

ROADRUNNER DELIVERY SERVICE 155 GATEWAY BLVD. SACRAMENTO CA 94230

Figure 13–4 Federal Tax Deposit Coupon (Form 8109) for Federal Unemployment Taxes

Darken only one

Darken only one

TYPE OF TAX

TAX PERIOD

941

945

1st Quarter

990C

1120

2nd Quarter

943

990-T

3rd Quarter

720

990PF

4th Quarter

CT-1

1042

940

35

FOR BANK USE IN MICR ENCODING

Federal Tax Deposit Coupon

Form 8109

State Unemployment Taxes State unemployment taxes are usually paid on a quarterly basis.

B u s i n e s s Tr a n s a c t i o n Roadrunner pays $866.32 to the state, as shown in Figure 13–2. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

354

1. State Unemployment Tax Payable and Cash in Bank are affected. 2. State Unemployment Tax Payable is a liability account. Cash in Bank is an asset account. 3. State Unemployment Tax Payable is decreased by $866.32. Cash in Bank is decreased by $866.32.

4. Decreases in liability accounts are recorded as debits. Debit State Unemployment Tax Payable for $866.32. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $866.32.

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 354

9/15/05 1:27:15 PM

6.

T ACCOUNTS

State Unemployment Tax Payable Debit
866.32

JOURNAL ENTRY

Cash in Bank

Credit 

7.

Credit
866.32

Debit 

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

POST. REF.

20-July 15 State Unemployment Tax Pay. Cash in Bank Check 211

PAGE DEBIT

34

CREDIT 1

8 6 6 32

2

8 6 6 32

3 4

Other Payroll Liabilities Employers also make payment for employees’ voluntary deductions.

B u s i n e s s Tr a n s a c t i o n On July 15 Roadrunner pays $28.38 for hospital insurance premiums. (Refer to Figure 13–1.) ANALYSIS

Identify Classify
/

1. The accounts Hospital Insurance Premiums Payable and Cash in Bank are affected. 2. Hospital Insurance Premiums Payable is a liability account. Cash in Bank is an asset account. 3. Hospital Insurance Premiums Payable is decreased by $28.38. Cash in Bank is decreased by $28.38.

DEBIT-CREDIT RULE

4. Decreases in liabilities are debits. Debit Hospital Insurance Premiums Payable for $28.38. 5. Decreases in assets are credits. Credit Cash in Bank for $28.38.

T ACCOUNTS

6.

Hospital Insurance Premiums Payable Debit
28.38

JOURNAL ENTRY

7.

Cash in Bank

Credit 

Credit
28.38

Debit 

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

20-July 15 Hospital Ins. Premiums Pay. Cash in Bank Check 212

POST. REF.

PAGE DEBIT

35

CREDIT 1

2 8 38

2

2 8 38

Section 3 Tax Liability Payments and Tax Reports

338-371_CH13_868829.indd 355

3 4

355

9/15/05 1:29:17 PM

Posting the Payment of Payroll Liabilities After the payments for the employer’s payroll liabilities have been journalized, the entries are posted to the appropriate general ledger accounts. Figure 13–5 shows Roadrunner’s general ledger accounts after posting. ACCOUNT Employee’s Federal Income Tax Payable

BALANCE

POST. DESCRIPTION REF.

DATE

20-June 23 Balance 30 July 15

ACCOUNT NO. 210

DEBIT

✓ G29 G31

CREDIT

DEBIT

2 9 3 18 3 9 3 18

1 0 0 00 3 9 3 18

ACCOUNT Employee’s State Income Tax Payable

20-June 23 Balance 30 July 15

ACCOUNT NO. 215 BALANCE

POST. DESCRIPTION REF.

DATE

DEBIT

✓ G29 G32

CREDIT

DEBIT

3 2 1 12 3 4 8 13

3 4 8 13 ACCOUNT NO. 220 BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30 30 July 15

DEBIT

✓ G29 G30 G31

CREDIT

DEBIT

✓ G29 G30 G31

ACCOUNT NO. 225 BALANCE

DEBIT

CREDIT

Figure 13–5 General Ledger Accounts after Posting of Payroll Liabilities Payments

356

POST. DESCRIPTION REF.

20-June 23 Balance 30 July 15

✓ G29 G35

DEBIT

CREDIT

5 8 63 7 8 20 9 7 78

1 9 57 1 9 58 9 7 78

ACCOUNT Hospital Insurance Premium Payable DATE

2 5 0 35 3 3 4 08 4 1 7 80

4 1 7 80

POST. DESCRIPTION REF.

20-June 23 Balance 30 30 July 15

CREDIT

8 3 73 8 3 72

ACCOUNT Medicare Tax Payable DATE

CREDIT

2 7 01

ACCOUNT Social Security Tax Payable DATE

CREDIT

ACCOUNT NO. 230 BALANCE

DEBIT

CREDIT

2 3 65

DEBIT

CREDIT

4 73 2 8 38

2 8 38

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 356

9/15/05 1:29:19 PM

ACCOUNT State Unemployment Tax Payable DATE

POST. DESCRIPTION REF.

20-June 23 Balance 30 July 15

✓ G30 G34

ACCOUNT NO. 240 BALANCE

DEBIT

CREDIT

DEBIT

7 9 3 41 8 6 6 32

7 2 91 8 6 6 32

ACCOUNT Federal Unemployment Tax Payable DATE

ACCOUNT NO. 245 BALANCE

POST. DESCRIPTION REF.

20-June 23 Balance 30 July 15

CREDIT

DEBIT

✓ G30 G33

CREDIT

DEBIT

CREDIT

1 1 8 80 1 2 9 60

1 0 80 1 2 9 60

Figure 13–5 General Ledger Accounts after Posting of Payroll Liabilities Payments (continued)

Preparing Payroll Tax Forms How Does the Government Receive Payroll Information? Employers must complete a variety of payroll-related tax forms. Form

Name of Form

When Filed

W-2

Wage and Tax Statement

Annually

W-3

Transmittal of Wage and Tax Statements

Annually

941

Employer’s Quarterly Federal Tax Return

Quarterly

940

Employer’s Annual Federal Unemployment (FUTA) Tax Return

Annually

Forms W-2 and W-3 The Wage and Tax Statement, Form W-2 , summarizes an employee’s earnings and withholdings for the calendar year. Form W-2 reports (1) gross earnings, (2) federal income tax withheld, (3) FICA taxes withheld, and (4) state and local income taxes withheld. Each employee receives a Form W-2 by January 31 of the following year. Employees use Form W-2 to prepare their individual income tax returns. Figure 13–6 on page 358 shows the Form W-2 for Emily Kardos. Employers prepare many copies of Form W-2. The employer sends Copy A to the IRS and gives Copies B and C to the employee. The employer keeps Copy D. Additional copies are sent to city or state government if necessary. The employer files Form W-3 , Transmittal of Wage and Tax Statements, with the federal government along with the Forms W-2. Form W-3 summarizes the information on the Forms W-2. Forms W-2 and W-3 are due by February 28. The federal government uses the Form W-2 information to check individual income tax returns. Figure 13–7 on page 358 shows Roadrunner’s Form W-3.

Section 3 Tax Liability Payments and Tax Reports

338-371_CH13_868829.indd 357

357

9/15/05 1:29:21 PM

a Control number OMB No. 1545-0008 Wages, tips, other compensation

1

b Employer’s identification number

31-8042398

2

Federal income tax withheld

4

Social security tax withheld

6

Medicare tax withheld

8

Allocated tips

8,246.00

c Employer’s name, address, and ZIP code

Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230 d Employee’s social security number

664.00

3

Social security wages

5

Medicare wages and tips

7

Social security tips

9

Advance EIC payment

10

Dependent care benefits

Nonqualified plans

12

Benefits included in box 1

14

Other

8,246.00

511.25

8,246.00

119.57

201-XX-XXXX 11

e Employee’s name, address, and ZIP code

Emily M. Kardos 809 East Main Street Sacramento, CA 94230

13

15 Statutory Deceased Pension employee plan 16 State

Form

Figure 13–6 Form W-2 Wage and Tax Statement

17 State wages, tips, etc.

Employer’s state I.D. no.

CA

484972

W-2

8,246.00

Wage and Tax Statement

20

18 State income tax

19 Locality name

Legal rep.

Hshld. emp.

Subtotal

Deferred compensation

20 Local wages, tips, etc. 21 Local income tax

128.74

Department of the Treasury – Internal Revenue Service

Copy 1 For State, City, or Local Tax Department

✓

5

7210

67,210.35

5,396.00

67,210.35

4,167.04

67,210.35

974.55

31-8042398 Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230

Maria Sanchez

Owner

1/29/20--

Figure 13–7 Transmittal of Wage and Tax Statements

Forms 941 and 940 Form 941 , illustrated in Figure 13–8, is the employer’s quarterly federal tax return that reports accumulated amounts of FICA and federal income taxes withheld from employees’ earnings, as well as FICA tax owed by the employer. The employer’s federal unemployment tax is reported annually on Form 940 .

358

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 358

9/15/05 1:29:23 PM

Roadrunner Delivery Service

June 30, 20-31-8042398

155 Gateway Blvd.

Sacramento, CA 94230

9,252 96 747 64 0 00 9,252 96 9,252 96

773 1,147 0 268

55 37 00 33

1,415 70 0 00 1,415 70 2,163 34 0 00 2,163 34 2,163 34 0 00

627.29

627.29

Maria Sanchez

908.76 Maria Sanchez, Owner

2,163.34

6/30/20--

Figure 13–8 Form 941 Section 3 Tax Liability Payments and Tax Reports

338-371_CH13_868829.indd 359

359

9/15/05 1:29:30 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Different payroll tax forms are used for different purposes. Using a chart like this one, indicate the purpose of each form.

���� ��� ���

�������

��� ���

Do the Math Small businesses (those that have revenues of less than $200,000 per year) pay their federal taxes by the 15th day of the month following the payroll month. Large businesses pay their taxes every two weeks. Review the graph, and answer the following questions. 1. Which businesses pay their taxes every two weeks? 2. What percent of businesses represented in the circle graph are large businesses?

Annual Revenue in Dollars $158,000 $215,000 $125,000

Morgan Manufacturing Ziggy's Ice Cream Lights and More Beverly Drive Spa Stanford Tools Plains Educational Supply

$420,000 $95,000

$220,000

Problem 13–4 Payment of Payroll Liabilities The following account balances appear in the general ledger for Soap Box Laundry on April 30.

General Ledger Social Security Tax Payable State Income Tax Payable Medicare Tax Payable Employees’ Federal Income Tax Payable

Instructions Record the payment of the four liability accounts on page 34 of the general journal. (Hint: Two checks are written.)

$318.55 205.60 113.28 286.00

Problem 13–5 Analyzing a Source Document PAYROLL REGISTER TOTAL HOURS

ALLOW.

NAME

MAR. STATUS

EMPLOYEE NUMBER

PAY PERIOD ENDING May 19 RATE

20 --

DATE OF PAYMENT May 19, 20-DEDUCTIONS

EARNINGS REGULAR

OVERTIME

TOTAL

SOC. SEC. MEDICARE TAX TAX

FED. INC. TAX

STATE INC. TAX

HOSP. INS.

OTHER

TOTAL

NET PAY

CK. NO. 25

25

TOTALS 1,218 93 109 14 1,328 07

82 34

19 26 184 00

26 56

20 00

332 16

995 91

Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.

Instructions Based on this payroll register, record the appropriate journal entry in your working papers. Use page 14 in the general journal.

360

Chapter 13 Payroll Liabilities and Tax Records

338-371_CH13_868829.indd 360

10/13/05 10:30:42 PM

Accounting Careers in Focus DIRECTOR OF SHARED SERVICES

Lear Corporation, Dearborn, Michigan Bonnie Sims Q: A: Q: A:

What does Lear Corporation do? We manufacture parts for the interiors of automobiles.

What are the responsibilities of your job? I oversee a unit of our company that is called a shared service center. Shared service centers allow companies to centralize their financial, administrative, or customer support functions.

Q: Why did you choose an accounting career? A: I was born into a family of accountants. Accounting was something in which I was always interested.

Q: What has helped you succeed? A: My success is due in large part to hard work and dedication.

.. Tips from . ould always Your résumé sh along with a be submitted tter. The letter strong cover le y d upon the ke should expan résumé, highpoints in your nce s and experie light your skill e th relevant to that are most d explain job opening, an it the benef how you can ployer. em prospective

I started my career as an accounts payable clerk, eventually became an accountant, and then worked in the shared services center at Lear. I’m now the director. Always keep your goals in mind and continually work toward them.

Q: What do you like most about your job? A: I like that it involves accounting, finance, and project management. This mix provides me with many challenges.

Q: What types of challenges? A: The biggest is dealing with periods like quarter-end. Things get extremely busy and hectic!

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Oversee accounts payable, expense reporting, and payroll departments; hire, train, and manage accounting staff. Training or Education Needed: A bachelor’s degree in accounting or finance; at least seven years’ experience. Aptitudes, Abilities, and Skills: Strong communication, technology, analytical, and management skills. Salary Range: $45,000 to $115,000 depending on experience, company size, industry, and location. Career Path: Gain public accounting experience, and then move to a corporate environment. Gradually assume positions with increasing responsibility.

Thinking Critically

Why is it important for managers to be able to see the big picture? Chapter 13 Accounting Careers in Focus

338-371_CH13_868829.indd 361

361

9/15/05 1:29:52 PM

Summary

CH A P T ER 13 Key Concepts

1. Total gross earnings are often recorded in the Salaries Expense account. Amounts withheld from employees’ earnings are liabilities of the business. The payroll register is the source document for paying the payroll. The payroll transaction is journalized here: GENERAL JOURNAL DATE 1 2

20-Date

3 4 5 6 7 8 9

DESCRIPTION

POST. REF.

9

PAGE DEBIT

CREDIT 1

Salaries Expense Emplys’ Fed. Inc. Tax Pay. Emplys’ State Inc. Tax Pay. Social Sec. Tax Pay. Medicare Tax Pay. Hosp. Ins. Premiums Pay. U.S. Savings Bonds Pay. Cash in Bank

xxx xx

2

x x x xx x x x xx x x x xx x x x xx x x x xx x x x xx x x x xx

3 4 5 6 7 8 9

2. Employers pay taxes on employees’ gross earnings. These taxes are in addition to the amounts withheld from earnings. The employer payroll taxes are an operating expense of the business. (Withheld taxes are not an expense. The business merely serves as the collection agent for the government.) Employers pay the following payroll taxes: social security FICA Medicare FUTA—federal unemployment insurance SUTA—state unemployment insurance 3. The employer sends tax deposits to government agencies at regular intervals: Paid by Tax Type

Tax Rate

Federal income tax Based on W-4

362

Employee (Withholding)

Employer (Expense)

How Paid EFTPS or Form 8109 (941 oval)

✓

Social security

6.2% of earnings up to $90,000 (2  6.2%  12.4%)

✓

✓

EFTPS or Form 8109 (941 oval)

Medicare

1.45% of total earnings (2  1.45%  2.9%)

✓

✓

EFTPS or Form 8109 (941 oval)

FUTA

6.2% minus SUTA rate up to 5.4% (usually 6.2%
5.4%  .8%) of earnings up to $7,000

✓

EFTPS or Form 8109 (940 oval)

Chapter 13 Summary

338-371_CH13_868829.indd 362

9/15/05 1:29:55 PM

Summary

State Income Tax

Based on W-4

SUTA

Varies by state

C HAPT E R 1 3

✓

Varies by state

✓

Varies by state

4. The deposit for FICA and federal income tax is journalized here:

GENERAL JOURNAL DATE 1 2 3 4 5

20-Date

DESCRIPTION

POST. REF.

PAGE DEBIT

12

CREDIT 1

Emplys’ Fed. Inc. Tax Pay. Social Security Tax Pay. Medicare Tax Pay. Cash in Bank

x x x xx x x x xx x x x xx

2 3 4

x x x xx

5

5. A business is legally required to make various reports to different government agencies at specified time intervals. They report this information on various payroll-related tax forms: 1. Form W-2—Wage and Tax Statement—is filed annually. It summarizes each employee’s calendar-year earnings and withholdings. 2. Form W-3—Transmittal of Wage and Tax Statements—is filed annually. It summarizes the information on the employees’ Forms W-2 and is sent along with the Forms W-2. 3. Form 941—Employer’s Quarterly Federal Tax Return—is filed quarterly. It reports the federal income tax and the FICA tax (for both employee and employer). 4. Form 940—Employer’s Annual Federal Unemployment (FUTA) Tax Return—is filed annually. It reports the employer’s federal unemployment taxes.

Key Terms Electronic Federal Tax Payment System (EFTPS)

(p. 351)

Form W-2

(p. 357)

Federal Unemployment Tax Act (FUTA)

Form W-3

(p. 357)

(p. 347)

Payroll Tax Expense

(p. 347)

Form 8109

(p. 351)

Salaries Expense

(p. 340)

Form 940

(p. 358)

State Unemployment Tax Act (SUTA)

(p. 347)

Form 941

(p. 358)

unemployment taxes

(p. 347)

Chapter 13 Summary

338-371_CH13_868829.indd 363

363

9/15/05 1:29:59 PM

C H A P T ER 13 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

Journalizing Payroll Transactions a. In what expense account are employees’ earnings often recorded? b. List the accounts in which the payroll liabilities for federal income tax and Medicare tax are recorded. Employer’s Payroll Taxes a. Which payroll taxes are expenses to the business? b. On what amount are the employer’s FICA taxes computed? Computing Payroll Tax Expense a. How is the employer’s share of FICA tax calculated? b. The share of both the employer’s and employee’s FICA tax is calculated using the same percentages, but the amount for each can differ slightly. What causes this? Journalizing Tax Liabilities a. What is the journal entry to record the FUTA tax expense? b. The amount of the FICA tax deposit is twice as much as the employer’s FICA tax expense. Why? Payroll Tax Reports and Forms a. What is the difference between Form 940 and Form 941? b. What information does Form W-3 contain?

Apply Key Terms You are the owner of Accurate Financial Services. You have just been hired by Brad Justice, the owner of a new company called Snack Shack, to help establish a payroll system. As a new business owner, Brad understands the importance of complying with government requirements, but he is concerned that he may not be aware of all of the requirements related to payroll. Using the following key terms, prepare a presentation for Brad describing the government requirements for payroll. Electronic Federal Tax Payment System (EFTPS) Federal Unemployment Tax Act (FUTA) Form 8109 Form 940 Form 941

364

Form W-2 Form W-3 Payroll Tax Expense Salaries Expense State Unemployment Tax Act (SUTA) unemployment taxes

Chapter 13 Review and Activities

338-371_CH13_868829.indd 364

4/6/06 6:09:20 PM

Computerized Accounting

C HAPT E R 1 3

Recording and Paying Payroll Tax Liabilities Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Record and post payroll entries; pay payroll tax liabilities

• Prepare the payroll journal entry based on the payroll register totals. • Post the payroll entries to the general ledger. • Prepare tax liability checks to pay federal, state, and local taxing authorities. • Prepare journal entries to record the payment of the liabilities.

• When the payroll checks are generated, the payroll tax journal entries are automatically prepared and posted.

Q&A Peachtree Question

Answer

How do I journalize the employer’s tax liabilities?

• When payroll checks are issued, Peachtree automatically journalizes the tax liabilities.

How do I pay the payroll tax liabilities?

1. 2. 3. 4. 5.

Select Payments from the Tasks menu. Select the taxing authority ID to be paid. Enter the amount and cash account number. Enter description and general ledger account (tax liability account). Click Print.

QuickBooks Q & A QuickBooks Question

Answer

How do I journalize the employer’s tax liabilities?

• When payroll checks are issued, QuickBooks Payroll service automatically journalizes the liabilities.

How do I pay the payroll tax liabilities?

1. Select Process Payroll Liabilities from the Employees menu, and then select Pay Payroll Liabilities. 2. Enter the date range for the liabilities you want to pay, and click OK. 3. In the Pay by Check tab, enter the bank account and the check date, and then mark the items to be paid. 4. Click Create.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 13 Computerized Accounting

338-371_CH13_868829.indd 365

365

9/15/05 1:30:16 PM

Problems

C H A P T ER 13 Complete problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 13–6 1. Select the spreadsheet template for Problem 13–6. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

SMART GUIDE Step–by–Step Instructions: Problem 13–7 1. Select the problem set for Kits & Pups Grooming (Prob. 13–7). 2. Rename the company and set the system date. 3. Record the payroll entry using the General Journal Entry option. 4. Print a General Journal report and a General Ledger report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 13–6 Calculating Employer’s Payroll Taxes Instructions For each of the total gross earnings amounts recorded in the past five pay weeks for Hot Suds Car Wash, determine these taxes: • employer’s FICA taxes (social security 6.2%, Medicare 1.45%) • federal unemployment tax (.8%) • state unemployment tax (5.4%) Use the form provided in the working papers. None of the employees has reached the taxable earnings limit. Total gross earnings: 1. $914.80 2. $1,113.73 3. $2,201.38

Analyze

4. $791.02 5. $1,245.75

Explain the relationship between federal and state unemployment tax rates.

Problem 13–7 Recording the Payment of the Payroll The totals of the payroll register for Kits & Pups Grooming are shown in your working papers. On December 31 the owner, Abe Shultz, wrote Check 1400 to pay the payroll.

Instructions In your working papers: 1. Record the payroll entry in the general journal. 2. Post the entry to the general ledger accounts.

Analyze

Identify the payroll liability account that has the largest credit entry.

Problem 13–8 Journalizing Payroll Transactions The Outback Guide Service payroll register for the week ending Dec. 31 follows: PAYROLL REGISTER

3 4

31 28 33 35

Coleman, Clarence Lorman, Victoria Peterson, Peg Torrez, Joyce

TOTAL HOURS

2

ALLOW.

1

NAME

MAR. STATUS

EMPLOYEE NUMBER

PAY PERIOD ENDING Dec. 31 RATE

M S S M

1 1 1 2

41 30 38 36

7.60 8.00 7.25 7.25

20 --

DATE OF PAYMENT Dec. 31, 20--

EARNINGS REGULAR

304 240 275 261

00 00 50 00

OVERTIME

11 40

DEDUCTIONS TOTAL

315 240 275 261

40 00 50 00

SOC. SEC. MEDICARE TAX TAX

19 14 17 16

55 88 08 18

4 3 3 3

57 48 99 78

FED. INC. TAX

21 00 21 00 26 00 6 00

STATE INC. TAX

6 4 5 5

HOSP. INS.

31 80 51 22

OTHER

(UD)5

40

(UD)5

40

TOTAL

51 49 52 36

43 56 58 58

NET PAY

263 190 222 224

97 44 92 42

CK. NO. 1 2 3 4 24

24

25

25

TOTALS 1,080 50

11 40 1,091 90

67 69

15 82

74 00

21 84

10 80

190 15

901 75

Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.

366

Chapter 13 Problems

338-371_CH13_868829.indd 366

9/15/05 1:30:26 PM

Problems

C HAPT E R 1 3

Instructions In your working papers: 1. Record the entry for the payment of the payroll on page 15 of the general journal. (Check 1201, dated Dec. 31). 2. Use the information in the payroll register to compute the employer’s payroll taxes: • FICA taxes (6.2% for social security, 1.45% for Medicare) • federal unemployment tax (0.8%) • state unemployment tax (5.4%) None of the employees has reached the taxable earnings limit. 3. Record the entry for the employer’s payroll taxes on page 15 of the general journal.

Analyze

Examine the entry recording the payment of payroll. Which account, Social Security Tax Payable or Employees’ Federal Income Tax Payable, had the larger credit?

Problem 13–9 Recording and Posting Payroll Transactions Showbiz Video completed the following payroll transactions during the first two weeks of December. Showbiz Video pays its employees on a biweekly basis (every two weeks).

Instructions In your working papers: 1. Record the December 13 transactions on page 38 in the general journal. 2. Post both payroll entries to the appropriate general ledger accounts. 3. Journalize and post the December 16 transactions. Date

Transactions

Dec. 13 Wrote Check 2206 to pay the payroll of $3,840.58 (gross earnings) for the pay period ending December 13. The following amounts were withheld: FICA taxes, $238.12 for social security and $55.69 for Medicare; employees’ federal income taxes, $639.00; employees’ state income taxes, $96.02; insurance premium, $21.00; U.S. savings bonds, $20.00. 13 Recorded the employer’s payroll taxes (FICA tax rates, 6.2% for social security and 1.45% for Medicare; federal unemployment tax rate, 0.8%; state unemployment tax rate, 5.4%). No employee has reached the maximum taxable amount. 16 Paid the amounts owed to the federal government for employees’ federal income taxes and FICA taxes, Check 2215. 16 Purchased U.S. savings bonds for employees for $100.00, Check 2216.

SMART GUIDE Step–by–Step Instructions: Problem 13–8 1. Select the problem set for Outback Guide Service (Prob. 13–8). 2. Rename the company and set the system date. 3. Record the payment of the payroll and the employer’s payroll taxes. 4. Print a General Journal and a General Ledger report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 13–8 1. Restore the Problem 13-8.QBB file. 2. Enter the payroll transactions using Make General Journal Entries and Write Checks options. 3. Print a Journal report and a General Ledger report. 4. Proof your work. 5. Complete the Analyze activity. 6. Back up your work.

SOURCE DOCUMENT PROBLEM Problem 13–9 Use the source documents in your working papers to complete this problem.

CONTINUE

Chapter 13 Problems

338-371_CH13_868829.indd 367

367

4/6/06 6:09:28 PM

Problems

C H A P T ER 13 Date

16

SMART GUIDE

Transactions (cont.)

Paid $148.00 to American Insurance Company for employees’ insurance, Check 2217.

Analyze

Step–by–Step Instructions: Problem 13–9 1. Select the problem set for Showbiz Video (Prob. 13–9). 2. Rename the company and set the system date. 3. Record the transactions. 4. Print a General Journal report and a General Ledger report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 13–9 1. Restore the Problem 13-9.QBB file. 2. Enter the payroll transactions. 3. Print a Journal and a General Ledger report. 4. Complete the Analyze activity. 5. Back up your work.

CHALLENGE PROBLEM

Gross earnings Social security tax Medicare tax Employees’ federal income tax Employees’ state income tax

$12,543.40 777.69 181.88 662.00 250.87

Instructions In your working papers: 1. Prepare Check 1602 (payable to “Job Connect Payroll Account”) to transfer the net pay amount to the payroll checking account. 2. On page 19 of the general journal, record the payment of the payroll. 3. Post the payroll transaction to the general ledger. 4. Compute payroll tax expense forms and journalize the entry to record employer’s payroll taxes using these rates:

5. 6.

Step–by–Step Instructions: Problem 13–10

368

Problem 13–10 Recording and Posting Payroll Transactions

Job Connect pays its employees twice a month. Employee earnings and tax amounts for the pay period ending December 31 are:

SMART GUIDE

1. Select the problem set for Job Connect (Prob. 13–10). 2. Rename the company and set the system date. 3. Record all transactions. 4. Print a General Journal report and a General Ledger report. 5. Proof your work. 6. Manually prepare Form 8109. 7. Complete the Analyze activity. 8. End the session.

Identify the payroll accounts that have a balance after entries have been posted.

7. 8.

• social security, 6.2% • state unemployment, 5.4% • Medicare, 1.45% • federal unemployment, 0.8% No employee has reached the taxable earnings limit. Post the entry to the general journal. Prepare checks dated December 31 to pay the following payroll liabilities: (a) Federal unemployment taxes, payable to First City Bank (Check 1603). (b) State unemployment taxes, payable to the State of North Carolina (Check 1604). (c) Employees’ federal income taxes and FICA taxes, payable to First City Bank (Check 1605). Journalize and post the entries for the payment of the payroll liabilities. Complete payroll tax expense forms. Prepare a Form 8109 for each of the two federal tax deposits paid in Instruction 6, parts (a) and (c). The oval for FICA and federal income tax is 941. The oval for the federal unemployment tax is 940.

Analyze

Calculate the employer’s total payroll-related expense for the pay period.

Chapter 13 Problems

338-371_CH13_868829.indd 368

4/6/06 6:09:29 PM

Winning Competitive Events

CHAPTER 13

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. When a semimonthly payroll is paid, the credit to Cash is equal to the a. total earnings of all employees. b. total deductions for income tax and social security tax. c. total deductions. d. net pay for all employees. 2. The form that accompanies the payment of taxes to the federal government is a a. Form W-2. b. Form 8109. c. Form 940. d. Form 941.

Business Professionals of America MULTIPLE CHOICE 3. The account payroll taxes expense is used for a. recording employees’ federal income taxes withheld. b. recording employees’ social security and Medicare taxes. c. recording the employer’s social security and Medicare taxes. d. recording the employer’s social security, Medicare, FUTA, and SUTA taxes. 4. Until the amounts withheld from employee salaries are paid by the employer, they are recorded as a. assets. b. liabilities. c. salary expense. d. revenue. 5. The accounting document that provides a basis for recording payroll transactions is a. the payroll register. b. the employee earnings records. c. the general ledger. d. the general journal.

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 13. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

338-371_CH13_868829.indd 369

Chapter 13 Winning Competitive Events

369

10/13/05 10:30:57 PM

C H A P T ER 13 Critical Thinking

Payroll Records and Reports

CASE

STUDY

Payroll: Warehousing Center

ETHICS

Money Shuffling

a mattoefr

))

$ )) Communicating ACCOUNTING

370

Real-World Applications and Connections

1. When employees are paid, what amount is credited to Cash in Bank? 2. Why do employees’ paycheck deductions become liabilities of the business? 3. Suppose that a business is located in a state that has an income tax. The business allows employees to take deductions for U.S. savings bonds. List the payroll liability accounts this business would have. 4. Predict what might happen to the Social Security Tax Payable account balance if the Salaries Expense entry was posted but the Payroll Tax Expense entry was never posted. 5. Design a diagram that shows FICA taxes from the payroll date through the tax deposit date. 6. Employers must deposit payroll taxes before they file the payroll tax returns. Do you agree with this practice? Why or why not? Morrison Distribution Center offers warehousing services. The company is considering adding a third shift with 12 new employees. Estimate the third shift payroll costs assuming: (1) The average warehouse employee earns $21,000 per year. (2) The state unemployment tax rate is 5.4% and the federal rate is 0.8% (both apply to the first $7,000 of earnings). (3) The employer’s cost of health insurance averages 22% of an employee’s earnings. INSTRUCTIONS 1. Calculate the salary expense related to adding the 12 new employees. 2. Compute the additional payroll taxes Morrison will pay. 3. Determine the total cost to add the third shift. Suppose that you are an accounting clerk at Cybercafé. The business owner wants you to use employees’ 401(k) withholdings to pay off a pressing debt. She believes she can replace the funds within two months and that the employees will not lose very much by not having their money invested during that time. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Public Speaking As the senior payroll clerk for Fashion Square Gift Shop, you are to explain the deductions from employees’ payroll checks at a new employee orientation. 1. Prepare an outline and visuals of the items you need to discuss. 2. Pair with a classmate and give your presentations to each other. Focus on both verbal and nonverbal communication skills (eye contact, gestures, and facial expressions). Give each other feedback and suggestions for improvements.

Chapter 13 Real-World Applications and Connections

338-371_CH13_868829.indd 370

9/15/05 1:30:34 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Self-Management People with self-management skills can set attainable goals and motivate themselves. ON THE JOB As a payroll clerk, you process all payroll and tax reports. It is December. What do you need to do now to make sure you process the payroll tax reports on time? INSTRUCTIONS Describe the reports you will need to file, and name the payroll records you will need to complete each one.

Cultural Values of Employees Dutch sociologist Geert Hofstede interviewed thousands of employees worldwide to understand their cultures and values. One value dimension he studied was individualism—emphasis on the individual and individual achievement. He found that individualism is important in the United States, where workers prefer to work independently and do not expect organizations to take care of them. In Latin American countries like Mexico, employees value group experience, expect close supervision, and want their company to take care of their interests. INSTRUCTIONS Discuss these differences found by Hofstede.

Your Payroll Deductions You may have wondered how your employer pays the taxes and other deductions from your paycheck. PERSONAL FINANCE ACTIVITY Ask your friends what deductions are taken from their paychecks (categories, not amounts). Identify the forms related to the deductions and write a brief report about the deductions and forms. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 13.

Employee Costs Employee benefits might include paid vacations and health insurance. Many employers calculate the cost of benefits as a percentage of total salaries. INSTRUCTIONS Use the payroll register on page 320 and payroll tax information in this chapter to answer these questions. Tax Obligations 1. If the employee benefits cost 24% of As you explore different ways employee regular earnings, what is the of compensating employees, benefits cost for this salary period? remember that taxes still apply. 2. If a new employee is to be hired for a Visit glencoeaccounting 40-hour work week at wages of $8 an hour, .glencoe.com and click on Student Center. Click on what would be the total weekly cost for the WebQuest and select Unit 3 to new employee? (The company estimates its continue your Internet project. employee benefits cost at 22%.)

glencoeaccounting.glencoe.com

338-371_CH13_868829.indd 371

C HAPT E R 1 3

Chapter 13 Real-World Applications and Connections

371

9/15/05 1:30:43 PM

MINI PRACTICE SET 3

Payroll Accounting

Main Task ▲

Prepare the weekly payroll for Green Thumb Plant Service.

Summary of Steps ▲

Calculate gross earnings, deductions, and net pay.

▲

Prepare the payroll register.

▲

Write paychecks for the employees.

▲

Enter information on employee’s earnings records.

▲

Journalize and post the payroll transaction.

▲

Calculate, journalize, and post the employer’s payroll tax liability.

▲

Make the payroll tax deposit.

▲

Journalize and post the payroll tax deposit.

▲

Pay the insurance premium, and journalize and post the entry.

Why It’s Important ▲

Payroll is a basic cost of doing business.

372

The Plant Service

Green Thumb Plant Service

Company Background: Green Thumb Plant Service is a plant maintenance company that is located in Kingsbury, Michigan. It is a service business that is organized as a sole proprietorship. It is owned and operated by Joanna Ecke. The company places and maintains plants, flowers, and small trees in offices and corporate buildings. The business has been in operation for almost five years. During that time its revenue has increased each year, additional employees have been hired, and the business is now showing a good profit. Payroll Information: The business presently employs eight people. A Form W-4 is on file for each employee. The list that follows summarizes the data on those documents. Michael Alter Christine Cuddy Jesse Dubow Joclyn Filley Greg Millette Heather Repicky Daniel Ripp Yourself

Single Single Single Single Married Married Married Single

claims claims claims claims claims claims claims claims

1 0 0 1 2 3 2 1

exemption exemptions exemptions exemption exemptions exemptions exemptions exemption

The business pays its employees on a weekly basis. Overtime is paid at the rate of 1½ times the regular rate of pay for all hours worked over 40. The weekly pay period runs from Monday through Saturday, with employees being paid on Saturday for the week’s work. Because most office buildings are closed on Sunday, the business is also closed. The employees are paid by one of three methods: hourly rate, salary, or salary plus 10% commission on any new accounts they acquire for the company. The following table lists the employees, the method by which their wages are computed, and other pertinent information. Next, you will find the time cards for the employees who are paid on an hourly basis.

Mini Practice Set 3

372-375_MPS03_868829.indd 372

9/7/05 2:41:34 PM

Green Thumb Plant Service (continued) Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Complete the project using:

Empl. No.

Employee

Employee Status

Position

Heather Repicky Greg Millette

010 011

Manager Salesperson

Full-time Full-time

Jesse Dubow Joclyn Filley Daniel Ripp Christine Cuddy Michael Alter Yourself

012 013 016 018 019 022

Bookkeeper Supply clerk Service Service Supply clerk Accounting clerk

Part-time Full-time Full-time Full-time Part-time Part-time

Rate of Pay $725.00/weekly salary $450.00/week plus 10% Commission $250.00/week $7.40/hour $8.30/hour $8.30/hour $7.10/hour $175.00/week

The time cards for the hourly-rate employees are shown here. 018 Christine Cuddy 223-XX-XXXX SOC. SEC. NO. 7/25/20-WEEK ENDING

019 Michael Alter 049-XX-XXXX SOC. SEC. NO. 7/25/20-WEEK ENDING NO.

NO.

NAME

NAME

DAY

IN

OUT

IN

IN

OUT

M

2:00 5:00

OUT

DAY

TOTAL

IN

OUT

IN

IN

OUT

M

9:00 12:00 12;30 5:00

T

2:00 6:00

T

9:00 11:30 12:00 5:00

W

3:00 5:00

W

9:00 1:00

Th

2:00 6:00

Th

9:00 12:00 12:30 4:00

F

2:00 6:00

F

8:30 1:00 1:30 3:00

S

9:00 2:00

S

9:00 1:30

OUT

TOTAL

S

S

TOTAL HOURS 016 DanielHOURS Ripp RATE AMOUNT 011-XX-XXXX SOC. SEC. NO. REGULAR 7/25/20-WEEK ENDING OVERTIME

TOTAL HOURS 013 JoclynHOURS Filley RATE AMOUNT 042-XX-XXXX SOC. SEC. NO. REGULAR 7/25/20-WEEK ENDING OVERTIME

NO.

NO.

NAME

NAME

DAY M SIGNATURE

IN

OUT

TOTAL EARNINGS IN IN OUT

OUT

TOTAL

DAY M SIGNATURE

9:00 12:00 1:00 3:00 DATE

IN

OUT

TOTAL EARNINGS IN IN OUT

OUT

TOTAL

9:00 12:00 12:30 5:00 DATE

T

9:00 12:00 1:00 5:00

T

9:00 12:30 1:00 6:00

W

8:00 12:00 1:00 5:00

W

9:00 12:00 1:00 4:30

Th

9:00 12:00 1:00 3:30

Th

8:30 12:30 1:00 5:00

F

9:00 12:00 1:00 4:00

F

9:00 11:30 12:00 5:00

S

9:00 12:00

S

9:00 1:00

S

S

TOTAL HOURS

TOTAL HOURS HOURS

RATE

HOURS

AMOUNT

AMOUNT

Step–by–Step Instructions: 1. Select the problem set for Green Thumb Plant Service (MP–3). 2. Rename the company and set the system date. 3. Enter your name for employee record 022. 4. Record the weekly payroll and print checks for all employees using the Payroll Entry option. 5. Print a Payroll Register for the current week and proof your work. 6. Print a Payroll Journal report. 7. Calculate and record the employer’s payroll tax expense using the General Journal Entry option. 8. Record the deposit for the taxes owed to the federal government and enter the monthly insurance premium using the General Journal Entry option. 9. Manually complete Form 8109. 10. Print a General Journal report and proof your work. 11. Print a General Ledger report. 12. Print Quarterly Earnings reports for Michael Alter and Greg Millette. 13. Complete the Analyze activity and complete the Audit Test. 14. End the session.

OVERTIME

OVERTIME

TOTAL EARNINGS

TOTAL EARNINGS

SIGNATURE

RATE

REGULAR

REGULAR

SMART GUIDE

DATE

SIGNATURE

DATE

Use the federal tax tables in the working papers to determine federal income tax withholding. These are the rates for other taxes: state income tax, 2%; FICA (employee and employer contributions) social security tax, 6.2% and Medicare tax, 1.45%; state unemployment tax, 5.4%; and federal unemployment tax, 0.8%. Mini Practice Set 3

372-375_MPS03_868829.indd 373

373

9/7/05 2:41:41 PM

MINI PRACTICE SET 3 (CONTINUED)

Green Thumb Plant Service

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: 1. Restore the Mini Practice Set 3.QBB file. 2. Enter your name in the Employee List. 3. Record the weekly payroll using the Pay Employees option and print the checks for all employees using the Write Checks option. 4. Print paychecks and an Employee Earnings Summary report. 5. Calculate and record the employer’s payroll tax expense using the Make General Journal Entries option. 6. Record the deposit for the taxes owed to the federal government, and enter the monthly insurance premium using the Write Checks option. 7. Manually complete Form 8109. 8. Print a Journal report for July 21–25 and proof your work. 9. Print a General Ledger report. 10. Print a Payroll Summary report. 11. Complete the Analyze activity using the Profit & Loss Standard and Journal reports, and complete the Audit Test. 12. Back up your work.

374

YOUR JOB RESPONSIBILITIES Green Thumb Plant Service The business entered the third quarter of its fiscal year at the beginning of July. It is presently the last week of July. Jesse Dubow, the bookkeeper, is leaving on vacation. In his absence you are to prepare this week’s payroll. (1) Complete the timecards for the four hourly employees. Enter the total hours worked at the bottom of each card. Complete each timecard to the nearest quarter hour. (2) Greg Millette recorded additional clients that brought in $925.00 in new business. Calculate his commission and add it to his salary to determine his gross earnings. (3) Enter the payroll information for all employees in the payroll register. Each employee was recently assigned an employee number because the business is soon converting to an automated payroll preparation system. Since this payroll is being prepared manually, list the employees in the payroll register in alphabetical order by last name. (4) Use the following information to complete the payroll register. (a) Use the federal tax chart to determine income tax amounts to be withheld. (b) Michael Alter, Christine Cuddy, Joclyn Filley, and Greg Millette each have $5.00 deducted for the purchase of U.S. savings bonds.

(5) (6)

(7)

(8)

(9)

(c) Jesse Dubow, Heather Repicky, and Daniel Ripp each have $4.00 deducted for donations to the United Way. (d) All employees pay an insurance premium each week. Married employees pay $9.00 and single employees pay $6.00. (e) None of Green Thumb’s employees has reached the maximum taxable amount for the social security tax. Calculate the net pay for each employee. Total all amount columns in the payroll register. Prove the accuracy of the totals. Write Check 972 for the amount of the total net pay on the regular checking account of the business. Make the check payable to the Green Thumb Plant Service—Payroll Account. In Jesse’s absence Joanna Ecke will sign the check for you. Complete the deposit slip for the payroll account. Record the payroll transaction in the general journal, page 21. Use the information contained in the payroll register and Check 972 as the source documents. Post the transaction to the general ledger accounts. Write the paychecks for the employees. Use the information in the payroll register to complete the check stubs. After a check has been written for an employee, enter the check number in the payroll register.

Mini Practice Set 3

372-375_MPS03_868829.indd 374

4/6/06 6:10:46 PM

Green Thumb Plant Service (continued) (10) Enter this week’s payroll information on the employee’s earnings records for Michael Alter and Greg Millette only. Be sure to add the current gross earnings amount to the accumulated total. (11) Calculate and record the employer’s taxes for this pay period in the general journal. The source of information is the payroll register. Post the journal entry to the general ledger. (12) Make a deposit for the taxes owed to the federal government. The total includes the amounts withheld for

Analyze

employees’ federal income tax, social security tax, and Medicare tax. Complete Form 8109 by entering the amount owed. Write Check 973, payable to the First Federal Bank for the taxes. (13) Enter the transaction in the general journal and post the entry to the general ledger. (14) Pay the monthly insurance premium by writing Check 974 to the American Insurance Company for $228.00. Record the payment in the general journal and post the entry to the general ledger.

Identify the pay method that had the highest employee gross earnings this week.

Mini Practice Set 3

372-375_MPS03_868829.indd 375

375

4/6/06 6:10:47 PM

UNIT 4

The Accounting Cycle for a Merchandising Corporation

Personal Finance Q & A Q: Why is learning about merchandising corporations important to me? A: Most of the things you buy are probably purchased at merchandising corporations. Learning about these businesses can help you make wise consumer decisions. Q: Where can I find financial information about these corporations? A: The financial sections of newspapers and magazines often have information about well-known corporations. THINK IT OVER Name several large merchandising corporations. What are some of the most popular items sold at each company? 376

376-377_UN04_868829.indd 376

9/13/05 4:42:42 PM

Internet Project Cyber-Shopping Online shopping is a growing business with more than $100 million in annual sales. Consumers shop online for convenience and sometimes out of necessity. Because of their remote locations, people in Hawaii and Alaska make the most Internet purchases. In this project you will learn how to shop safely online. Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on WebQuest and select Unit 4. Begin your WebQuest by reading the Task. Continue working on your WebQuest as you study Unit 4.

Chapter 14 16 Page

18

20

21

413 479 549 611 637

THE BIG PICTURE HAPPY HOL-E-DAYS Some 54% of Americans will use the Web to find holiday gifts. Here is what they will do online:

66%

COMPARE PRICES

62%

BROWSE FOR GIFT IDEAS

57%

PURCHASE PRESENTS SEND CARDS OR PHOTOS

42%

Data: American Express Retail Index Source: Reprinted by permission from BusinessWeek.

glencoeaccounting.glencoe.com

376-377_UN04_868829.indd 377

377

9/13/05 4:43:07 PM

CH A P T ER 14

Accounting for Sales and Cash Receipts BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the difference between a service business and a merchandising business.

1. 2. 3. 4.

2.

Analyze transactions relating to the sale of merchandise.

3.

Explain the difference between a retailer and a wholesaler.

4.

5.

Record a variety of sales and cash receipt transactions in a general journal. Define the accounting terms introduced in this chapter.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING SALES

Underground Station If you are looking for the latest in urban-savvy footwear, Underground Station has you covered. From Puma to Fila, Phat Farm to GBX, this store has the brands that can take you

▲

Why It’s Important

from the basketball court to the dance floor.

As a consumer, you have frequent contact with merchandising businesses.

found exclusively in malls. This changed with the grand

Until recently Underground Station retail stores were opening of a large “street store” in the main shopping district in the heart of Brooklyn, New York. With the popularity of the brands it carries, Underground Station thinks the new sales strategy will be a good fit. Underground Station wants to attract more women shoppers in the coming years. The company hopes that a new advertising campaign and more cutting-edge buyers in the shoe division will do the trick.

What Do You Think? When shoppers purchase shoes at Underground Station, what general ledger accounts do you think are affected?

378

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 378

4/6/06 5:58:22 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Making sales is key to the financial success of a business. Sales dollars come from selling products or services to customers. Companies like Underground Station, Target, and Foot Locker buy merchandise and sell it to customers. Accurate tracking of sales transactions helps these businesses decide what merchandise to offer. Journalizing cash receipts is an essential part of recording sales revenue.

glencoeaccounting.glencoe.com

378-413_CH14_868829.indd 379

Personal Connection 1. Does your work or the work of friends or family involve selling merchandise? 2. What information from these sales do you think should be recorded in the accounting records?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 14.

379

9/12/05 3:09:12 PM

SECTION 1

BEFORE YOU

READ

Main Idea

A wholesaler sells to retailers, and a retailer sells to the final users.

Read to Learn… ➤ the operating cycle for a

merchandising business. (p. 380) ➤ the accounts used in a merchandising business. (p. 382) ➤ issues relating to international sales. (p. 382)

Key Terms retailer wholesaler merchandise inventory Sales

Accounting for a Merchandising Business As you remember, a service business is one that provides a service to the public for a fee. In contrast a merchandising business buys goods (such as computers, clothing, and furniture) and then sells those goods to customers for a profit. You’re probably familiar with merchandising businesses like Tower Records or Wal-Mart. Most merchandising businesses operate either as retailers or as wholesalers. Some merchandising businesses are both retailers and wholesalers. A retailer is a business that sells to the final user, that is, to you—the consumer. A wholesaler is a business that sells to retailers. In this chapter we will analyze transactions relating to the sale of merchandise for On Your Mark Athletic Wear, a retailer. Refer to the chart of accounts for On Your Mark Athletic Wear.

The Operating Cycle of a Merchandising Business How Is the Operating Cycle Different from the Accounting Cycle? Recall that the accounting cycle is a series of tasks performed in a single period to maintain records. The merchandising business operating cycle is a series of transactions, as illustrated in Figure 14–1. The collection of cash from sales enables the business to purchase more items to sell, pay expenses, and make a profit. As long as the company is in business, this is a continuous, repeating sequence. 1

Purchase of goods for resale

2

Sale of goods for cash

2

Sale of goods on account (customer account)

4

3

Cash

Collect cash from accounts

Pay expenses •utilities

Figure 14–1 The Operating Cycle for a Merchandising Business 380

Profit

•rent

•employee earnings •miscellaneous

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 380

4/6/06 5:58:36 PM

ON YOUR MARK ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207

CHART OF ACCOUNTS ASSETS 101 105 110 115 117 118 120 125

Cash in Bank Change Fund Petty Cash Fund Accounts Receivable Allowance for Uncollectible Accounts Notes Receivable Interest Receivable Merchandise Inventory

130 135 140 142 145 147 150 152

Supplies Prepaid Insurance Delivery Equipment Accumulated Depreciation—Delivery Equipment Office Equipment Accumulated Depreciation—Office Equipment Store Equipment Accumulated Depreciation—Store Equipment

LIABILITIES 201 202 203 204 205 211

Accounts Payable Notes Payable Discount on Notes Payable Federal Corporate Income Tax Payable Employees’ Federal Income Tax Payable Employees’ State Income Tax Payable

212 213 214 215 220

Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable

STOCKHOLDERS’ EQUITY 301 Capital Stock 305 Retained Earnings

310 Income Summary REVENUE

401 Sales 405 Sales Discounts

410 Sales Returns and Allowances 415 Interest Income COST OF MERCHANDISE

501 Purchases 505 Transportation In

510 Purchases Discounts 515 Purchases Returns and Allowances EXPENSES

BRE DIM GAL KLE MON RAH RAM SOU SUL TAM WON YOU

Break Point Sports Club Dimaio, Joe Galvin, Robert Klein, Casey Montero, Anita Rahim, Shashi Ramos, Gabriel South Branch High School Athletics Sullivan, Megan Tammy’s Fitness Club Wong, Kim Young, Lara

▼

Accounts Receivable Subsidiary Ledger

645 650 655 657 660 665 670 675 680

....................................

Advertising Expense Bankcard Fees Expense Cash Short and Over Delivery Expense Depreciation Expense—Delivery Equipment Depreciation Expense—Office Equipment Depreciation Expense—Store Equipment Federal Corporate Income Tax Expense Insurance Expense Interest Expense

▼

601 605 610 612 615 620 625 630 635 640

Loss/Gain on Disposal of Plant Assets Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Uncollectible Accounts Expense Utilities Expense Accounts Payable Subsidiary Ledger

CHA COM DAR FAS GEA PRO SLF SNS

Champion Store Supply Computer Solutions Dara’s Delivery Service FastLane Athletics Geary Office Supply Pro Runner Warehouse Sports Link Footwear Sports Nutrition Supply

Section 1 Accounting for a Merchandising Business

378-413_CH14_868829.indd 381

381

9/12/05 3:09:46 PM

AS YOU

READ

Compare and Contrast Merchandise Inventory and Sales Accounts How are the two accounts, Merchandise Inventory and Sales, similar? How are they different?

Accounts Used by a Merchandising Business What Accounts Does a Merchandising Business Use? A merchandising business buys goods from a wholesaler or a manufacturing business and then sells these goods to its customers. Goods bought for resale are called merchandise . The items of merchandise the business has in stock are referred to as inventory .

Merchandise Inventory Account

The inventory of a business is represented in the general ledger by the asset account Merchandise Inventory. Increases to Merchandise Inventory are recorded as debits, and decreases are recorded as credits. The normal balance of the Merchandise Inventory account is a debit. At the beginning of each period, the dollar amount of merchandise in stock is indicated by Merchandise Inventory the debit balance in Merchandise Inventory. During the operating cycle, the business sells merchandise that is in Credit Debit
 stock and purchases new items to replace the inventory sold. The sale Decrease Side Increase Side of merchandise and the purchase of new merchandise are recorded in Normal Balance separate accounts.

Sales Account

Sales Debit
Decrease Side

When a retail merchandising business sells goods to a customer, the amount of the merchandise sold is recorded in the Sales account. Sales is a revenue account. Increases to the Sales account are recorded as credits, and decreases are recorded as debits. The normal balance of the Sales account is a credit. Both cash sales and sales on account are recorded as credits to the Sales account. Sales on account affect the Accounts Receivable account, and cash sales affect the Cash in Bank account.

Credit  Increase Side Normal Balance

International Sales What Challenges Face a Company That Has International Sales? When companies have sales transactions on an international level, many complexities arise. The obligations and rights of each party to the sale extend across borders and into different sets of legal requirements. The United Nations Convention on Contracts for the International Sales of Goods (CISG) was created to provide guidelines and laws governing the international sale of goods. While “The Convention” does not cover sales of all goods, it governs most business-to-business transactions. International sales also introduce the challenge of multiple currencies. Which currency will be used for the transaction? How will currency exchange rates affect revenue? These are just a few considerations that must be examined when conducting international sales. 382

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 382

9/12/05 3:09:49 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Create a table similar to this one to describe service businesses and merchandising businesses.

"USINESS4YPE

7HATIS3OLD

7HOISTHE#USTOMER

3ERVICE

2ETAILER

7HOLESALER

Do the Math Alpine Outfitters estimates the annual cost of maintaining merchandise inventory to be 10% of the inventory value. Alpine’s accountants are preparing a budget for the coming year, and they plan to maintain an inventory valued at $1.5 million. Answer the following questions: 1. What is the estimated cost of maintaining the inventory? 2. If the inventory was valued at $2 million, and the estimated rate of maintenance was 11%, what would be the estimated annual maintenance cost?

Problem 14–1 Recording Merchandising Transactions Instructions Record the following transactions in T-account form in your working papers for Sharp Shot Camera Shop. A partial chart of accounts follows: General Ledger Cash in Bank Accounts Receivable Merchandise Inventory Accounts Payable Sales Date

Apr.

4 10 20 25

Transactions

Sold 10 Canon cameras on account for $3,000, Sales Slip 224. Sold 2 dozen photo albums for $150, cash, Sales Slip 225. Sold 4 rolls of 35mm film for $24 cash, Sales Slip 226. Sold a Canon camera to a customer for $380 cash, Sales Slip 227.

Section 1 Accounting for a Merchandising Business

378-413_CH14_868829.indd 383

383

4/6/06 5:58:44 PM

SECTION 2

BEFORE YOU

READ

Main Idea

In addition to using the general ledger, a business keeps a subsidiary ledger of individual customer accounts.

Read to Learn… ➤ what a sale on account

involves. (p. 384) ➤ the purpose of the accounts receivable subsidiary ledger. (p. 385) ➤ how to journalize sales on account. (p. 386) ➤ how to journalize and post sales returns and allowances. (p. 389)

Key Terms

sale on account charge customer credit cards sales slip sales tax credit terms accounts receivable subsidiary ledger subsidiary ledger controlling account sales return sales allowance credit memorandum contra account

384

Analyzing Sales Transactions In a merchandising business, the most frequent transaction is the sale of merchandise. Some businesses sell on a cash-only basis. Others sell only on credit. Most businesses handle both cash and credit sales.

Sales on Account What Does a Sale on Account Involve? The sale of merchandise that will be paid for at a later date is called a sale on account , a charge sale, or a credit sale. The sale on account is made to a charge customer ; this credit option is also called a charge account.

Store Credit Card Sales Charge customers use credit cards issued by a business such as Target to make their purchases. A store credit card, imprinted with the customer’s name and account number, facilitates the sale on account.

Nonbank Credit Card Sales In the next section, you will learn about bank credit cards. We consider nonbank credit cards here because they are similar to a store credit card. A nonbank credit card is a credit card issued by corporations such as American Express and Diners Club. Nonbank credit card sales are considered a form of credit sales because payment is collected at a later date.

Items Related to Sales on Account A charge sale involves a sales slip, which shows the amount of tax charged and the credit terms. The Sales Slip. A sales slip is a form that lists these details: date of the sale; customer account identification; and description, quantity, and price of the item(s) sold. The description may include the physical details (such as “white athletic socks”), a stock number, or both. A sales slip is usually prepared in multiple copies. The customer receives the original as a receipt and as proof of purchase. The number of copies kept by the business varies with its needs. A copy is always used for accounting purposes as the source document for recording the journal entry. Prenumbered sales slips help businesses keep track of all sales made on account. On Your Mark uses prenumbered sales slips printed with its name and address. On Your Mark’s sales slip is shown in Figure 14–2. Notice that the total amount on the sales slip includes cost of the items sold and sales tax.

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 384

9/12/05 3:09:57 PM

Sales Tax. Most states and some cities tax the retail sale ON YOUR MARK of goods and services with a sales tax . Items subject to sales ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207 tax and sales tax rates vary from state to state. The sales tax rate DATE: December 1, 20-NO. 50 is usually stated as a percentage of the sale, such as 5%. Sales tax rates are determined by the proper taxing authority. Casey Klein SOLD 3345 Spring Creek Parkway TO The sales tax is paid by the customer and collected by the Plano, Texas 75074 business. The business acts as the collection agent for the state CLERK CASH CHARGE TERMS B.E. ✓ n/30 or city government. (In the future we will refer only to the state UNIT government.) At the time of the sale, the business adds the sales QTY. PRICE DESCRIPTION AMOUNT $ 100.00 $ 100 00 1 Pair Running Shoes tax to the total selling price of the goods. Periodically, the busi60 00 10.00 6 Pair Athletic Socks ness sends the collected sales tax to the state. Until the state is 40 00 40.00 1 Vinyl Jacket/Pants paid, however, the sales tax collected from customers represents a liability of the business. The business keeps a record of the sales tax owed to the state in Sales Tax Payable a liability account called Sales SUBTOTAL $ 200 00 Credit Debit Tax Payable. For Sales Tax SALES TAX 12 00 
Payable, the increase and $ 212 00 TOTAL Thank You! Increase Side Decrease Side balance side is a credit and Normal Balance the decrease side is a debit. Figure 14–2 On Your To calculate the sales tax, multiply the merchandise subtoMark Athletic Wear Sales Slip tal by the sales tax rate (see Figure 14–2). Casey Klein bought $200 worth of merchandise. The sales tax rate is 6%. The sales clerk multiplied $200 by 6% (.06) to compute the $12 sales tax. The total transaction amount is $212. Not all sales of retail merchandise are taxed. In most states, sales to taxexempt organizations, such as schools, are not taxed. For example, South Branch High School purchased $1,500 worth of merchandise on account. Schools are tax exempt, so no sales tax is added to the amount of the sale. Credit Terms. The sales slip in Figure 14–2 has space to indicate the MATH HINTS credit terms of the sale. Credit terms state the time allowed for payment. The credit terms for the sale to Casey Klein are n/30. The “n” stands for the Combining Math Functions When net, or total, amount of the sale. The “30” stands for the number of days the combining mathematical customer has to pay for the merchandise. Casey Klein owes On Your Mark functions such as $212 (the net amount) by December 31 (30 days after December 1). calculating and adding sales tax to a sale amount, keep the order of operations in mind: multiply first, then add. What Is a Subsidiary Ledger? Compute the transaction amount of a $184 Businesses with few charge customers usually include an Accounts sale of merchandise with Receivable account for each customer in the general ledger. A large busia 6% sales tax: ness, however, with many charge customers sets up a separate ledger that • multiply first contains an account for each charge customer. This ledger is called the ($184.00  0.06)  accounts receivable subsidiary ledger . A subsidiary ledger is a ledger, $11.04 • then add or book, that contains detailed data summarized to a controlling account ($184.00  $11.04)  in the general ledger. For example, the accounts receivable subsidiary ledger $195.04 contains details of all the individuals and businesses that owe money to a company. Summary information about accounts receivable appears in the Accounts Receivable account in the general ledger. Accounts Receivable is a

The Accounts Receivable Subsidiary Ledger

Section 2 Analyzing Sales Transactions

378-413_CH14_868829.indd 385

385

9/12/05 3:10:00 PM

controlling account because its balance equals the total of all account balances in the subsidiary ledger. The balance of Accounts Receivable thus serves as a control on the accuracy of the balances in the accounts receivable subsidiary ledger after all posting is complete. General Ledger Accounts Receivable—controlling account

$10,000

Accounts Receivable Subsidiary Ledger Individual Accounts Within Ledger: Brown, Joshua $2,000 Clark, Gillian 3,000 Greene, Jason 1,000 Perez, Sarita 4,000 Total $10,000

Controlling account balance equals total of accounts in subsidiary ledger.

Figure 14–3 shows the accounts receivable subsidiary ledger form used by On Your Mark. The subsidiary ledger account form has lines at the top for the name and address of the customer. In a manual accounting system, subsidiary ledger accounts are arranged in alphabetical order. They are not usually numbered. In a computerized system, however, each charge customer is assigned a specific account number. Notice that the subsidiary ledger account form has only three amount columns. The Debit and Credit columns are used to record increases and decreases to the customer’s account. There is only one Balance column. Since Accounts Receivable is an asset account, the normal balance is a debit, so one balance amount is sufficient. NAME ADDRESS DATE

DESCRIPTION

POST. REF.

DEBIT

CREDIT

BALANCE

Figure 14–3 Subsidiary Ledger Account Form

Recording Sales on Account How Are Sales on Account Recorded? AS YOU

READ

Key Point Sale on Account The accounts receivable part of the journal entry is posted to two places: • general ledger controlling account • subsidiary ledger customer account

386

According to the revenue recognition principle, revenue for a sale on account is recognized and recorded at the time of the sale, when it is earned. Revenue must also be realizable, which means that it is expected to be converted to cash. Look at On Your Mark’s sale on account to Casey Klein in the next business transaction. Notice that the debit in the general journal entry is to “Accounts Receivable/Casey Klein.” The slash indicates that two accounts are debited: Accounts Receivable (controlling) and Accounts Receivable—Casey Klein (subsidiary). As mentioned earlier, when merchandise is sold to tax-exempt organizations, such as school districts, sales tax is not charged. An example of such a transaction follows on page 388.

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 386

4/6/06 5:58:50 PM

ON YOUR MARK

B u s i n e s s Tr a n s a c t i o n

ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207

On December 1 On Your Mark sold merchandise on account to Casey Klein for $200 plus sales tax of $12, Sales Slip 50.

DATE: December 1, 20--

NO. 50

Casey Klein 3345 Spring Creek Parkway Plano, Texas 75074

SOLD TO CLERK

CASH

CHARGE

TERMS

✓

n/30

B.E.

ANALYSIS

Identify

Classify


/

1. The accounts affected are QTY. DESCRIPTION AMOUNT $ 100.00 $ 100 00 1 Pair Running Shoes Accounts Receivable (controlling), 60 00 10.00 6 Pair Athletic Socks Accounts Receivable—Casey Klein 40 00 40.00 1 Vinyl Jacket/Pants (subsidiary), Sales, and Sales Tax Payable. 2. Accounts Receivable (controlling) SUBTOTAL $ 200 00 and Accounts Receivable—Casey SALES TAX 12 00 Klein (subsidiary) are asset $ 212 00 TOTAL Thank You! accounts. Sales is a revenue account. Sales Tax Payable is a liability account. 3. Accounts Receivable (controlling) and Accounts Receivable—Casey Klein (subsidiary) are increased by the total amount, $212 (the dollar amount of merchandise sold plus sales tax). Sales is increased by the dollar amount of merchandise sold, $200. Sales Tax Payable is increased by the amount of sales tax charged, $12. UNIT PRICE

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Accounts Receivable (controlling) for $212. Also debit Accounts Receivable— Casey Klein (subsidiary) for $212. 5. Increases to revenue and liability accounts are recorded as credits. Credit Sales for $200 and Sales Tax Payable for $12.

T ACCOUNTS

6.

Accounts Receivable Debit  212

Sales

Credit


Accounts Receivable Subsidiary Ledger Casey Klein Debit  212

JOURNAL ENTRY

7.

Credit  200

Debit


Sales Tax Payable

Credit


Credit  12

Debit


GENERAL JOURNAL DATE 1 2 3 4 5

20-Dec.

DESCRIPTION

POST. REF.

PAGE DEBIT

20

CREDIT 1

1 Accts. Rec./Casey Klein Sales Sales Tax Payable Sales Slip 50

2 1 2 00

2

2 0 0 00 1 2 00

Section 2 Analyzing Sales Transactions

378-413_CH14_868829.indd 387

3 4 5

387

9/12/05 3:10:06 PM

B u s i n e s s Tr a n s a c t i o n On December 3 On Your Mark sold merchandise on account to South Branch High School Athletics for $1,500, Sales Slip 51. JOURNAL ENTRY

GENERAL JOURNAL

ON YOUR MARK

DATE

ATHLETIC WEAR

DESCRIPTION

POST. REF.

PAGE DEBIT

20

CREDIT

595 Leslie Street, Dallas, TX 75207

DATE: December 3, 20--

NO. 51

South Branch High School Athletics 1750 Rutgers Dr. Dallas, TX 75207

SOLD TO CLERK

CASH

B.E. QTY.

DESCRIPTION

CHARGE

TERMS

✓

2/10, n/30

UNIT PRICE

Baseball Uniforms

$ 40.00 $

600 00

15

Baseball Caps

20.00

300 00

15

Baseball Mitts

35.00

525 00

2

Baseballs

15.00

30 00

3

Baseball Bats

15.00

45 00

SUBTOTAL $ 1,500 00

Thank You!

TOTAL

7 8

3 Accts. Rec./So. Branch H.S. Sales Sales Slip 51

9

1 5 0 0 00

6

1 5 0 0 00

7 8 9

AMOUNT

15

SALES TAX

6

0 00 $ 1,500 00

This transaction is analyzed and recorded in the same manner as the December 1 entry for Casey Klein except there is no sales tax. On Your Mark’s accountant debits Accounts Receivable/South Branch High School Athletics for $1,500 and credits the Sales account for $1,500.

Sales Returns and Allowances

AS YOU

READ

In Your Experience Sales Returns Have you ever tried to return something you bought? Why did you want to return it? What was the result?

388

All merchandising businesses expect that some customers will be dissatisfied with their purchases. The reasons for dissatisfaction vary. An item may be damaged or defective. The color or size may be incorrect. Whatever the reason, merchants usually allow dissatisfied customers to return merchandise. Any merchandise returned for credit or a cash refund is called a sales return . Sometimes a customer discovers that merchandise is damaged or defective but still usable. When this happens, the merchant may reduce the sales price for the damaged merchandise. A price reduction granted for damaged goods kept by the customer is called a sales allowance . The Credit Memorandum. If the sales return or allowance occurs on a charge sale, the business usually prepares a credit memorandum. A credit memorandum lists the details of a sales return or allowance. The charge customer’s account is credited (decreased) for the amount of the return or allowance. Figure 14–4 shows a credit memorandum, or credit memo, used by On Your Mark. The credit memo was prepared when Gabriel Ramos returned merchandise that he bought on account on November 29. Note that the credit memo includes a description of the returned item, the reasons for the return, and the amount to be credited to Gabriel Ramos’ account. On Your Mark’s credit memo also includes spaces for the date and sales slip number of the original sale. Notice too that the total on the credit memo includes the sales tax charged on the original sale. The same form is used if Gabriel Ramos is instead given a sales allowance. Of course, the amount credited to his account would be less. The credit granted for an allowance is the difference between the original sales price and the reduced price.

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 388

9/12/05 3:10:11 PM

On Your Mark’s credit memos are prenumbered and prepared in duplicate. The original is given to the customer. The copy is kept by the business and is the source document used for the journal entry to record the transaction.

ON YOUR MARK

CREDIT MEMORANDUM

ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207

DATE:

NAME:

ORIGINAL SALES SLIP

APPROVAL

Nov. 29, 20--

No. 35

J.R.

QTY

December 4, 20--

✕

DESCRIPTION

MDSE RET

AMOUNT

1 Athletic Suit

$ 150 00

Gabriel Ramos 278 Summit Avenue Dallas, TX 75206

ADDRESS:

The Sales Returns and Allowances Account. Sales returns

REASON FOR RETURN

wrong color

Gabriel Ramos

THE TOTAL SHOWN AT THE RIGHT WILL BE CREDITED TO YOUR ACCOUNT.

CUSTOMER SIGNATURE

Sales Credit  Increase Side Normal Balance

Sales Returns and Allowances Debit  Increase Side Normal Balance

SUB TOTAL

Credit
Decrease Side

$ 150 00

SALES TAX TOTAL

and allowances decrease the total revenue earned by a business. This decrease, however, is not recorded in the Sales account. Instead, a separate account called Sales Returns and Allowances is used. Sales Returns and Allowances summarizes the total returns and allowances for damaged, defective, or otherwise unsatisfactory merchandise. If the Sales Returns and Allowances account balance is large in proportion to the Sales account balance, there may be merchandising problems. The Sales Returns and Allowances account is carefully analyzed to detect any trouble. The Sales Returns and Allowances account is a contra account. As a contra account , its balance decreases the balance of its related account. Sales Returns and Allowances is more specifically classified as a contra revenue account because it is related to a revenue account, Sales. Since the normal balance side of Sales is a credit, the normal balance side of Sales Returns and Allowances is a debit. This relationship is shown here:

Debit
Decrease Side

NO. 124

ORIGINAL SALES DATE

9 00 $ 159 00

Figure 14–4 Credit Memorandum

AS YOU

READ

Key Point Contra Accounts The normal balance of a contra account is the opposite of its related account.

Cash Refunds Sometimes a merchant will give a customer a cash refund instead of a credit. On Your Mark’s store policy is to give a cash refund only if the original sale was a cash sale. For cash refunds the Cash in Bank account is credited instead of Accounts Receivable.

Posting to the Accounts Receivable Subsidiary Ledger How Do You Post to the Accounts Receivable Subsidiary Ledger? Refer to Figure 14–5 on page 391. Look at the general journal entry. The credit is to Accts Rec./Gabriel Ramos. The slash indicates that both Accounts Receivable (controlling) and Accounts Receivable—Gabriel Ramos (subsidiary) are Section 2 Analyzing Sales Transactions

378-413_CH14_868829.indd 389

389

9/12/05 3:10:13 PM

CREDIT MEMORANDUM

ON YOUR MARK

B u s i n e s s Tr a n s a c t i o n

ATHLETIC WEAR

ORIGINAL SALES DATE

595 Leslie Street, Dallas, TX 75207

Nov. 29, 20--

DATE:

On December 4 On Your Mark issued Credit Memorandum 124 to Gabriel Ramos for the return of merchandise purchased on account, $150 plus $9 sales tax.

QTY

December 4, 20--

NO. 124

ORIGINAL SALES SLIP

APPROVAL

No. 35

J.R.

ANALYSIS

Classify


/

MDSE RET

AMOUNT

1 Athletic Suit

$ 150 00

Gabriel Ramos ADDRESS: 278 Summit Avenue Dallas, TX 75206 NAME:

REASON FOR RETURN

wrong color

Identify

✕

DESCRIPTION

Gabriel Ramos

THE TOTAL SHOWN AT THE RIGHT WILL BE CREDITED TO YOUR ACCOUNT.

SUB TOTAL

$ 150 00

SALES TAX

9 00

$ 159 00 1. The accounts affected are Accounts Receivable (controlling), Accounts Receivable—Gabriel Ramos (subsidiary), Sales Returns and Allowances, and Sales Tax Payable. 2. Accounts Receivable (controlling) and Accounts Receivable—Gabriel Ramos (subsidiary) are asset accounts. Sales Returns and Allowances is a contra revenue account. Sales Tax Payable is a liability account. 3. Sales Returns and Allowances is increased by $150. Sales Tax Payable is decreased by $9. Accounts Receivable (controlling) and Accounts Receivable—Gabriel Ramos (subsidiary) are decreased by $159. CUSTOMER SIGNATURE

TOTAL

DEBIT-CREDIT RULE

4. Increases to a contra revenue account are recorded as debits. Debit Sales Returns and Allowances for $150. Decreases to liability accounts are recorded as debits. Debit Sales Tax Payable for $9. 5. Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) for $159. Also credit Accounts Receivable— Gabriel Ramos (subsidiary) for $159.

T ACCOUNTS

6.

Sales Returns and Allowances

Accounts Receivable Credit
159

Debit 

Accounts Receivable Subsidiary Ledger Gabriel Ramos

JOURNAL ENTRY

7.

Credit 

Debit
9

GENERAL JOURNAL DATE

9 10 11 12

DESCRIPTION

4 Sales Returns and Allowances Sales Tax Payable Accts. Rec./Gabriel Ramos Credit Memorandum 124

13

390

Sales Tax Payable

Credit
159

Debit 

Credit


Debit  150

POST. REF.

PAGE DEBIT

20

CREDIT

1 5 0 00 9 00

9 10

1 5 9 00

11 12 13

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 390

9/12/05 3:10:20 PM

credited. Notice that a diagonal line is entered in the Post. Ref. column. This diagonal line indicates that the amount, $159, is posted in two places: first to the Account Receivable controlling account in the general ledger and then to the Gabriel Ramos account in the accounts receivable subsidiary ledger. After the amount is posted to the Accounts Receivable controlling account, the account number (115) is entered to the left of the diagonal line in the Posting Reference column. After the amount is posted to the subsidiary ledger account, Gabriel Ramos, a check mark (✓) is entered to the right of the diagonal line. GENERAL JOURNAL DATE

9 10 11 12

POST. REF.

DESCRIPTION

20

PAGE DEBIT

4 Sales Returns and Allowances 410 Sales Tax Payable 220 115 Accts. Rec./Gabriel Ramos ✓ Credit Memorandum 124

CREDIT

1 5 0 00 9 00

9 10

1 5 9 00

11 12

1 Post this amount

13

ACCOUNT Accounts Receivable DATE

20-Dec.

ACCOUNT NO. 115

to the Accounts Receivable controlling account

BALANCE

POST. DESCRIPTION REF.

DEBIT

CREDIT

DEBIT

CREDIT

2 Post this amount 1 Balance 1 3 4

✓ G20 G20 G20

6 6 7 7

2 1 2 00 1 5 0 0 00 1 5 9 00

259 471 971 812

ACCOUNT Sales Tax Payable DATE

20-Dec.

POST. DESCRIPTION REF.

1 Balance 1 4

to the subsidiary ledger account.

00 00 00 00 ACCOUNT NO. 220 BALANCE

DEBIT

✓ G20 G20

CREDIT

DEBIT

1 3 0 0 00 1 3 1 2 00 1 3 0 3 00

1 2 00 9 00

ACCOUNT Sales Returns and Allowances DATE

20-Dec.

ACCOUNT NO. 410 BALANCE

POST. DESCRIPTION REF.

1 Balance 4

CREDIT

DEBIT

✓ G20

CREDIT

DEBIT

CREDIT

1 8 5 0 00 2 0 0 0 00

1 5 0 00

Gabriel Ramos ADDRESS 278 Summit Ave., Dallas, TX 75206 NAME

DATE

Figure 14–5 Posting to the Accounts Receivable Subsidiary Ledger

20-Dec.

DESCRIPTION

1 Balance 4

POST. REF.

✓ G20

DEBIT

CREDIT

BALANCE

1 5 9 00 1 5 9 00

Section 2 Analyzing Sales Transactions

378-413_CH14_868829.indd 391

391

9/12/05 3:10:21 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a flowchart like this one. Enter labels in the boxes and next to the arrows. Use these terms to create the labels: general ledger, journal, posted to, recorded in, sales slip, subsidiary ledger. Terms can be used more than once.

3ALES4RANSACTIONS

Do the Math Assume the lighting fixture industry has $.065 in sales returns and allowances for every $1.00 in sales (in other words, an industry average of 6.5%). Last year Light House Gallery had sales of $900,000 and returns and allowances of $46,800. Answer the following questions: 1. What was Light House Gallery’s percentage of returns and allowances to sales? 2. Is the percentage favorable or unfavorable compared to the industry average?

Problem 14–2 Recording Sales on Account and Sales Returns and Allowances Transactions Instructions In your working papers, record the following transactions of Alpine Ski Shop on page 2 of the general journal. Use the following accounts: General Ledger Cash in Bank Accounts Receivable Merchandise Inventory

Sales Tax Payable Accounts Payable Sales Sales Returns and Allowances

Accounts Receivable Subsidiary Ledger Palmer, James Rodriguez, Anna Date

Transactions

Sept. 1 Sold $300 in merchandise plus sales tax of $18 on account to James Palmer, Sales Slip 101. 4 Sold $600 in merchandise plus $36 sales tax to Anna Rodriguez on account, Sales Slip 102. 7 Issued Credit Memorandum 15 to James Palmer for the return of $300 in merchandise plus sales tax of $18. 19 Anna Rodriguez telephoned the manager of Alpine Ski Shop and said that the zipper on her ski jacket is broken. The manager agreed to give her a $40 credit on her purchase, plus a $2.40 sales tax credit, Credit Memorandum 16.

392

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 392

9/12/05 3:10:22 PM

SECTION 3

Analyzing Cash Receipt Transactions

Each business must account for the cash it receives. In this section you will explore cash sales, charge sales, bankcard sales, and cash discounts.

BEFORE YOU

READ

Main Idea

Cash Transactions How Does Cash Come into a Business? A transaction in which money is received by a business is called a cash receipt . The three most common sources of cash for a merchandising business are payments for cash sales, charge sales, and bankcard sales. Cash is also received, though much less frequently, from other types of transactions. Let’s learn how to handle these four kinds of cash receipts.

Merchandising businesses receive cash from cash sales, payments on account, bankcard sales, and occasionally from other types of transactions.

Read to Learn… ➤ how and why businesses

receive cash. (p. 393)

Cash Sales

➤ how to calculate a cash

In a cash sale transaction, the business receives full payment for the merchandise sold at the time of the sale. The proof of sale and the source document generated by a cash sale transaction differ from those for a sale on account. Most retailers use a cash register to record cash sales. Instead of using preprinted sales slips, cash sales are recorded on two rolls of paper tape inside the cash register. The details of a cash sale are printed on the two tapes at the same time. The portion of one tape that contains a record of the sale is torn off and given to the customer as a receipt. The other tape remains in the register. A business totals and clears its cash register daily. The cash register tape lists the total cash sales and the total sales tax collected on these sales. The tape also shows the day’s total charge sales. A proof is usually prepared to show that the amount of cash in the cash register equals the amount of cash sales and sales tax recorded on the cash register tape. The proof and the tape are sent to the accounting clerk, who uses the tape like the one in Figure 14–6 as the source document for the journal entry to record the day’s cash sales.

➤ how to record cash receipts.

discount. (p. 394) (p. 395)

Key Terms cash receipt cash sale cash discount sales discount

Cash Sales

Dec. 15 Tape 3000.00 CA 180.00 ST

Charge Customer Payments Businesses record cash received on account from charge customers by preparing receipts. A receipt, shown in Figure 14–7 on page 394, is a form that serves as a record of cash received. Receipts are prenumbered and may be prepared in multiple copies. The receipt is a source document for the journal entry.

Sales Tax

Figure 14–6 Cash Register Tape

Section 3 Analyzing Cash Receipt Transactions

378-413_CH14_868829.indd 393

393

9/12/05 3:10:24 PM

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 301

Bankcard Sales

Many businesses accept bankcards. Unlike a store credit card, which is issued Dec. 5 20 -by a business and is used RECEIVED FROM Casey Klein $ 212.00 only at that business, a bankno card is issued by a bank and Two hundred twelve and /100 DOLLARS honored by many businesses. FOR On account The most widely used bank credit cards in North America RECEIVED BY are VISA, MasterCard, and Discover. Figure 14–7 Receipt for A debit card requires the entry of a personal identification number (PIN) Cash Received from a Charge on a keypad. The advantage of both cards to a store is that it does not have Customer to wait to receive payment until the bank collects from the cardholder. Both bank credit card and debit card transactions are usually recorded as though they are cash sales. However, some companies use a separate account for credit card sales. Bankcard sales can be processed manually using multicopy bankcard slips or electronically. Either way, the total bankcard sales and related sales taxes are totaled and listed on the end-of-day cash register tape. Figure 14–8 AS YOU shows a cash register tape indicating the day’s bankcard sales and related sales tax. The cash register tape is the source document to record bankcard Key Point sales. Bankcard sales are included on the daily cash proof. Bankcard Account In a manual system, the business uses a special deposit slip to deposit the The cardholder has an bankcard and credit card slips in its checking account. There is often a threeaccount with the bank, or four-day delay before the amount is credited to the checking account. not with the store. This is due to the time it takes the store’s bank to collect the funds from the various banks that issued the customers’ bankcards. In an electronic system, bankcard and credit cards are usually transmitted in daily batches, and the amount may be credited to the checking account of the business on the same or the next business day. Deposits of bankcard sales slips or electronic batch transmittal records are treated the same as cash deposits. 595 Leslie Street, Dallas, TX 75207

Michael Smith

READ

Bankcard Sales

Merchants may also receive cash from infrequent transactions, such as a bank loan or the sale of assets other than merchandise. A receipt is prepared to indicate the source of the cash received.

Dec. 15 Tape 55 700.00 BCS 42.00 ST

Sales Tax

Figure 14–8 Bankcard Sales Tape

394

Other Cash Receipts

Cash Discounts Why Do Businesses Give Cash Discounts? To encourage charge customers to pay promptly, some merchandisers offer a cash discount. A cash discount , or sales discount , is the amount a customer can deduct from the amount owed for purchased merchandise if payment is made within a certain time. A cash discount is an advantage to both the buyer, who receives merchandise at a reduced cost, and the seller, who receives cash quickly.

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 394

4/6/06 5:59:00 PM

Businesses do not offer cash discounts to all customers. Some offer them only to business customers. On Your Mark offers a cash discount to charge customers who buy merchandise in large quantities. Its credit terms are 2/10, n/30. These terms mean that the customer can deduct 2% of the merchandise cost if it pays within 10 days of the sale date. Otherwise, the full (net) amount is due within 30 days. A cash discount decreases the amount the business actually receives from the sale. Let’s look at an example. On December 3 On Your Mark sold $1,500 worth of merchandise on account to South Branch High School Athletics. It records the transaction as a credit to Sales and a debit to Accounts Receivable for $1,500. If South Branch pays within 10 days (by December 13), it will receive a cash discount. On Your Mark will receive $1,470, or the original price less the cash discount of $30.

Merchandise Sold 

1.

$1,500

Discount Rate



Discount

.02



$30



Amount Paid Sales Slip Amount  Discount Amount  Within Discount Period

2.

$1,500



$30

AS YOU

READ

In Your Own Words Cash Discount “South Branch High School received a cash discount.” What does this mean?

$1,470



Cash in Bank is debited for $1,470, the amount of cash actually received. Accounts Receivable is credited for the full $1,500 because the customer paid for the merchandise and does not owe any more on the purchase. The difference between $1,500 and $1,470, $30, is the discount amount. A cash discount is recorded only when the customer pays for the merchandise within the time stated. The discount is on the price of the merchandise before taxes. A separate account is used to record cash discounts taken by customers. The $30 discount is entered in the contra revenue account Sales Discounts, which reduces the revenue earned from sales. The normal balance of the Sales account is a credit. The normal balance of the Sales Discounts account is a debit. Sales Discounts

Sales Debit  Decrease Side

Credit  Increase Side Normal Balance

Debit  Increase Side Normal Balance

Credit  Decrease Side

Recording Cash Receipts How Do Businesses Record the Receipt of Cash? This section discusses recording cash from the four sources.

Charge Customer Payments

AS YOU

READ

It’s Not What It Seems Cash Receipt In a sales transaction, a cash receipt is not a source document. In this sense the term receipt means something that is received.

Let’s look at a payment from a charge customer.

Section 3 Analyzing Cash Receipt Transactions

378-413_CH14_868829.indd 395

395

4/6/06 5:59:02 PM

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 301

595 Leslie Street, Dallas, TX 75207

On December 5 On Your Mark received $212 from Casey Klein to apply to her account, Receipt 301.

20 --

Dec. 5 RECEIVED FROM Casey Klein

$ 212.00

Two hundred twelve and no/100

DOLLARS

FOR On account

ANALYSIS

Identify

Classify
/

RECEIVED BY

Michael Smith

1. The accounts affected are Cash in Bank, Accounts Receivable (controlling), Accounts Receivable—Casey Klein (subsidiary). 2. Cash in Bank, Accounts Receivable (controlling), and Accounts Receivable—Casey Klein (subsidiary) are asset accounts. 3. Cash in Bank increases by $212. Accounts Receivable (controlling) and Accounts Receivable—Casey Klein (subsidiary) decrease by $212.

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $212. 5. Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) for $212. Also credit Accounts Receivable— Casey Klein (subsidiary) for $212.

T ACCOUNTS

6.

Cash in Bank

Accounts Receivable

Credit


Debit  212

Credit
212

Debit 

Accounts Receivable Subsidiary Ledger Casey Klein Credit
212

Debit 

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

13 14 15

DESCRIPTION

5 Cash in Bank Accts. Rec./Casey Klein Receipt 301

16

POST. REF.

PAGE DEBIT

20

CREDIT

2 1 2 00

13

2 1 2 00

14 15 16

Cash Discount Payments When a customer pays for a purchase on account within the discount period, the amount paid equals the invoice amount less the cash discount.

396

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 396

9/12/05 3:10:29 PM

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 302

595 Leslie Street, Dallas, TX 75207

On December 12 On Your Mark received $1,470 from South Branch High School Athletics in payment of Sales Slip 51 for $1,500 less the discount of $30, Receipt 302.

One thousand four hundred seventy and no/100

Identify

Classify


/

DOLLARS

FOR On account RECEIVED BY

ANALYSIS

20 --

Dec. 12

RECEIVED FROM South Branch H.S. Athletics $ 1,470.00

Michael Smith

1. The accounts affected are Cash in Bank, Sales Discounts, Accounts Receivable (controlling), and Accounts Receivable—South Branch High School Athletics (subsidiary). 2. Cash in Bank, Accounts Receivable (controlling), and Accounts Receivable—South Branch High School Athletics (subsidiary) are asset accounts. Sales Discounts is a contra revenue account. 3. Cash in Bank is increased by $1,470. Sales Discounts is increased by $30. Accounts Receivable (controlling), and Accounts Receivable— South Branch High School Athletics (subsidiary) are decreased by $1,500.

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $1,470. Increases to contra revenue accounts are recorded as debits. Debit Sales Discounts for $30. 5. Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) for $1,500. Also credit Accounts Receivable— South Branch High School Athletics (subsidiary) for $1,500.

T ACCOUNTS

6.

Cash in Bank Debit  1,470

Accounts Receivable

Credit


Accounts Receivable Subsidiary Ledger South Branch High School Athletics

Sales Discounts Debit  30

JOURNAL ENTRY

7.

Credit
1,500

Debit 

Credit


Credit
1,500

Debit 

GENERAL JOURNAL DATE

16 17 18 19

DESCRIPTION

12 Cash in Bank Sales Discounts Accts. Rec./South Br. H.S. Receipt 302

POST. REF.

PAGE DEBIT

20

CREDIT

1 4 7 0 00 3 0 00

16 17

1 5 0 0 00

20

19 20

Section 3 Analyzing Cash Receipt Transactions

378-413_CH14_868829.indd 397

18

397

9/12/05 3:10:30 PM

Cash Sales As a rule, businesses journalize cash sales and make cash deposits daily. Let’s analyze transactions relating to sale of merchandise for cash on December 15.

Dec. 15 Tape 55

B u s i n e s s Tr a n s a c t i o n On December 15 On Your Mark had cash sales of $3,000 and collected $180 in sales taxes, Tape 55. ANALYSIS

Identify Classify


/

3000.00 CA 180.00 ST

1. The accounts affected are Cash in Bank, Sales, and Sales Taxes Payable. 2. Cash in Bank is an asset account. Sales is a revenue account. Sales Tax Payable is a liability account. 3. Cash in Bank is increased by $3,180. Sales is increased by $3,000. Sales Tax Payable is increased by $180.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $3,180. 5. Increases in revenue and liability accounts are recorded as credits. Credit Sales for $3,000, and Sales Tax Payable for $180.

T ACCOUNTS

6.

Cash in Bank

Sales

Credit


Debit  3,180

Credit  3,000

Debit


Sales Tax Payable Credit  180

Debit


JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

20 21 22 23

398

DESCRIPTION

15 Cash in Bank Sales Sales Tax Payable Tape 55

POST. REF.

PAGE DEBIT

20

CREDIT

3 1 8 0 00

20

3 0 0 0 00 1 8 0 00

21 22 23

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 398

9/12/05 3:10:36 PM

Bankcard Sales Let’s record sales paid by bankcard. Note the similarity to cash sales. Dec. 15 Tape 55

B u s i n e s s Tr a n s a c t i o n On Your Mark had bankcard sales of $700 and collected $42 in related sales taxes on December 15, Tape 55. ANALYSIS

Identify Classify
/

700.00 BCS 42.00 ST

1. The accounts affected are Cash in Bank, Sales, and Sales Tax Payable. 2. Cash in Bank is an asset account. Sales is a revenue account. Sales Tax Payable is a liability account. 3. Cash in Bank is increased by $742. Sales is increased by $700. Sales Tax Payable is increased by $42.

DEBIT-CREDIT RULE

4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $742. 5. Increases in revenue and liability accounts are recorded as credits. Credit Sales for $700 and Sales Tax Payable for $42.

T ACCOUNTS

6.

Cash in Bank Debit  742

Sales

Credit


Credit  700

Debit


Sales Tax Payable Credit  42

Debit


JOURNAL ENTRY

7.

GENERAL JOURNAL DATE

24 25 26 27

DESCRIPTION

POST. REF.

15 Cash in Bank Sales Sales Tax Payable Tape 55

PAGE DEBIT

20

CREDIT

7 4 2 00

24

7 0 0 00 4 2 00

25 26 27

Other Cash Receipts Occasionally a business receives cash from a transaction that does not involve the sale of merchandise. The Sales account is not used because the item is not a merchandise item.

Section 3 Analyzing Cash Receipt Transactions

378-413_CH14_868829.indd 399

399

9/12/05 3:10:37 PM

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 303

595 Leslie Street, Dallas, TX 75207

B u s i n e s s Tr a n s a c t i o n On December 16 On Your Mark received $30 from Mandy Harris, an office employee. She purchased a calculator that the business was no longer using, Receipt 303.

$ 30.00

Thirty and no/100

DOLLARS

FOR calculator RECEIVED BY

JOURNAL ENTRY

Michael Smith

GENERAL JOURNAL DATE 28 29 30

20 --

Dec. 16 RECEIVED FROM Mandy Harris

DESCRIPTION

POST. REF.

16 Cash in Bank Office Equipment Receipt 303

20

PAGE DEBIT

CREDIT

3 0 00

28

3 0 00

29 30

Figure 14–9 shows the transactions discussed in this chapter.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Figure 14–9 Sales and Cash Receipt Transactions 400

29 30

20-Dec.

DESCRIPTION

POST. REF.

PAGE DEBIT

20

CREDIT 1

1 Accts. Rec./Casey Klein Sales Sales Tax Payable Sales Slip 50 3 Accts. Rec./South Branch H.S. Sales Sales Slip 51 4 Sales Returns and Allowances Sales Tax Payable Accts. Rec./Gabriel Ramos Credit Memorandum 124 5 Cash in Bank Accts. Rec./Casey Klein Receipt 301 12 Cash in Bank Sales Discounts Accts. Rec./South Branch H.S. Receipt 302 15 Cash in Bank Sales Sales Tax Payable Tape 55 15 Cash in Bank Sales Sales Tax Payable Tape 55 16 Cash in Bank Office Equipment Receipt 303

2 1 2 00

2

2 0 0 00 1 2 00

3 4 5

1 5 0 0 00

6

1 5 0 0 00

7 8

1 5 0 00 9 00

9 10

1 5 9 00

11 12

2 1 2 00

13

2 1 2 00

14 15

1 4 7 0 00 3 0 00

16 17

1 5 0 0 00

18 19

3 1 8 0 00

20

3 0 0 0 00 1 8 0 00

21 22 23

7 4 2 00

24

7 0 0 00 4 2 00

25 26 27

3 0 00

28

3 0 00

29 30

Chapter 14 Accounting for Sales and Cash Receipts

378-413_CH14_868829.indd 400

9/12/05 3:10:43 PM

Assessment

SECTION 3 AFTER YOU

READ

Reinforce the Main Idea Create a table similar to this one to analyze four different types of cash receipt transactions, the debit and credit parts of each type, and the source document for each.

!CCOUNTS $EBITED

#ASH4RANSACTION

Do the Math This graph illustrates the sales of flowers throughout the year for Randy’s Florist. 1. The sale of tulips was highest in which month? 2. Which type of flower sells at a steady rate, regardless of the month?

!CCOUNTS #REDITED

3OURCE$OCUMENT

FLOWER SALES 6,000

Roses

5,000

Carnations

4,000

Iris

3,000 2,000

Tulips

1,000

Lilies

0 January

February

March

April

Problem 14–3 Analyzing a Source Document As the accounting clerk for Super Cycle Shop, you record the business transactions. The store’s manager hands you the source document shown here.

Instructions Analyze the source document and record the

May

June

May 15 Tape 40 1000.00 60.00 800.00 48.00

CA ST BCS ST

necessary entries on page 17 of the general journal.

Problem 14–4 Recording Cash Receipts Commerce Technology, a computer equipment retailer, had the following selected transactions in March.

Instructions Record each transaction on page 4 of the general journal in your working papers. Date

Mar.

Transactions

1 Sold one modem for $130 plus $10.40 sales tax, Sales Slip 49. 5 Sold one computer monitor to Kelly Wilson on account for $300 plus $24 sales tax, Sales Slip 55. 17 Bankcard sales totaled $750 plus $60 sales tax, Tape 65.

Section 3 Analyzing Cash Receipt Transactions

378-413_CH14_868829.indd 401

401

4/6/06 5:59:14 PM

CH A P T ER 14

Summary

Key Concepts 1. A service business provides a service to the public for a fee. In contrast a merchandising business buys goods and sells them to customers for a profit. 2. Accounts used by merchandising businesses include Merchandise Inventory, Sales, Sales Tax Payable, Sales Returns and Allowances, Sales Discounts, the Accounts Receivable controlling account, and individual customer accounts. The Merchandise Inventory account is an asset account used to record the value of the merchandise in stock. Merchandise Inventory Credit
Decrease Side

Debit  Increase Side Normal Balance

The Sales account is a revenue account used to record the sale of merchandise. Sales Debit
Decrease Side

Credit  Increase Side Normal Balance

Most states and some cities tax the retail sale of goods. Businesses collect sales tax and record it as a liability in the Sales Tax Payable account. Later the business sends a check to the state or city for the sales tax collected. Sales Tax Payable Debit
Decrease Side

Credit  Increase Side Normal Balance

The Sales Returns and Allowances account is used to record the cash refund or the credit granted to charge customers for returned or damaged merchandise. Sales Returns and Allowances Debit  Increase Side Normal Balance

Credit
Decrease Side

The Sales Discounts account is used to record the amount of any cash discount taken by charge customers. Sales Discounts Debit  Increase Side Normal Balance

Credit
Decrease Side

Accounts Receivable is a controlling account. Its balance must equal the sum of the customer account balances in the accounts receivable subsidiary ledger. 402

Chapter 14 Summary

378-413_CH14_868829.indd 402

9/12/05 3:10:55 PM

Summary

CHAPT E R 1 4

3. A retailer is a business that sells goods to the final user. A wholesaler sells goods to retailers. 4. The following summarizes the accounts involved in journalizing sales and cash receipts: Cash sales: Debit

Credit

Cash in Bank

Sales Sales Tax Payable

Sales on account: Debit

Credit

Accounts Receivable— Customer’s Name

Sales Sales Tax Payable

Payment for a sale on account: Debit

Credit

Cash in Bank

Accounts Receivable—Customer’s Name

Payment on account with a cash discount taken: Debit

Credit

Cash in Bank

Accounts Receivable—Customer’s Name Sales Discounts

Return of merchandise purchased on account: Debit

Credit

Sales Returns and Allowances Sales Tax Payable

Accounts Receivable—Customer’s Name

Return of merchandise purchased for cash: Debit

Credit

Sales Returns and Allowances Sales Tax Payable

Cash in Bank

Key Terms credit cards

accounts receivable subsidiary ledger

(p. 385)

cash discount

(p. 394)

cash receipt

(p. 393)

cash sale

(p. 393)

charge customer

(p. 384)

contra account

(p. 389)

controlling account

(p. 386)

sales allowance

(p. 388)

credit memorandum (p. 388)

sales discount

(p. 394)

credit terms

(p. 385)

sales return

(p. 388)

inventory

(p. 382)

sales slip

(p. 384)

merchandise

(p. 382)

sales tax

(p. 385)

retailer

(p. 380)

subsidiary ledger

(p. 385)

sale on account

(p. 384)

wholesaler

(p. 380)

Sales

(p. 382)

(p. 384)

Chapter 14 Summary

378-413_CH14_868829.indd 403

403

9/12/05 3:10:58 PM

C H A P T ER 14 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

Service Business and Merchandising Business a. Contrast a service business and a merchandising business. b. What are the two types of merchandising businesses? Sale of Merchandise a. What accounts are posted for a sale on account? b. How does a merchandising business act as a collection agency for the state government? Retailer and Wholesaler a. Which of the following businesses collects sales tax from customers: a wholesaler, a retailer, or both? b. What is the term for goods that a retailer buys from a wholesaler or a manufacturer to resell? Journalizing Sales and Cash Receipts a. Classify the following accounts: Merchandise Inventory, Sales, Sales Returns and Allowances, Sales Discounts, and Sales Tax Payable. b. Which accounts are affected when a business receives a payment from a charge customer who has taken a cash discount?

Apply Key Terms You have just hired Geoffrey Hillman to be the accounting clerk for the Hats Off Corporation, a merchandiser of hats, caps, and scarves. Geoffrey has worked as a payroll clerk, but not in sales or cash receipts jobs. To help him you have offered to make note cards with the definitions of the following terms. Provide an example of each term when possible. accounts receivable subsidiary ledger cash discount cash receipt cash sale charge customer contra account controlling account

404

credit cards credit memorandum credit terms inventory merchandise retailer sale on account Sales

sales allowance sales discount sales return sales slip sales tax subsidiary ledger wholesaler

Chapter 14 Review and Activities

378-413_CH14_868829.indd 404

4/6/06 5:59:20 PM

Computerized Accounting

CHAPT E R 1 4

Sales and Cash Receipts Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Recording sales transactions

• Prepare general journal entries based on a sales slip or an invoice. • Post journal entries to the appropriate general ledger accounts. • Calculate new account balances.

• Invoices can be created with the software and posted to the general ledger accounts at the same time. • New account balances are calculated for you.

Recording cash receipts transactions

• Prepare journal entries based on deposit slips, receipts, or cash register tapes. • Post journal entries to the appropriate general ledger accounts. • Calculate new account balances.

• Deposits are recorded and posted to the general ledger using the cash receipts task item. • General ledger accounts are updated automatically.

Q&A Peachtree Question

Answer

How do I record a sale on account?

1. 2. 3. 4.

How do I record a cash receipt from a customer on account?

1. From the Tasks menu, select Receipts. 2. In the Cash Account list, select the bank account in which the receipt is to be deposited. 3. Select the Apply to Invoices tab. Then select the invoices being paid. 4. Click Save.

From the Tasks menu, select Sales/Invoicing. Enter customer ID and invoice number. Click on the Apply to Sales tab. Enter details of the invoice and amount, and click Save.

QuickBooks Q & A QuickBooks Question

Answer

How do I record a sale on account?

1. From the Customers menu, select Create Invoices. 2. Enter the customer’s name, the date, and invoice number. 3. Enter the quantity and item code. QuickBooks will automatically fill in the description, price, and amount. 4. Click Save & Close.

How do I record a cash receipt from a customer on account?

1. 2. 3. 4.

From the Customers menu, select Receive Payments. Enter the customer’s name, the date, and the amount received. In the Applied to section, select the invoices being paid. Deposit the money either directly into a bank account or group with other undeposited funds to deposit at a later date, and click Save & Close.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 14 Computerized Accounting

378-413_CH14_868829.indd 405

405

9/12/05 3:11:07 PM

Problems

C H A P T ER 14 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 14–5 1. Select the problem set for Sunset Surfwear (Prob. 14–5). 2. Rename the company and set the system date. 3. Enter all sales on account transactions using the Sales/Invoicing option in the Tasks menu. 4. Process all credit memorandums using the Credit Memos option. 5. Record all cash receipts transactions using the Receipts option. 6. Print a Sales Journal report and a Cash Receipts Journal report. 7. Proof your work. 8. Complete the Analyze activity. 9. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 14–5 1. Restore the Problem 14-5.QBB file. 2. Enter all sales on account using the Create Invoice options from the Customers menu. 3. Process all credit memorandums using the Create Credit Memos/Refunds option from the Customers menu. 4. Record all cash receipts using the Receive Payments option from the Customers menu. 5. Print a Journal report. 6. Proof your work. 7. Complete the Analyze activity. 8. Back up your work.

406

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 14–5 Recording Sales and Cash Receipts Sunset Surfwear, a California-based merchandising store, had the following sales and cash receipt transactions for January. The partial chart of accounts for Sunset Surfwear follows. General Ledger 101 Cash in Bank 115 Accounts Receivable 215 Sales Tax Payable

401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

Accounts Receivable Subsidiary Ledger ADA Adams, Martha MOU Moulder, Nate HAM Hamilton, Alex WES Westwood High School Athletics JUN1 Jun, Helen

Instructions Record the following transactions on page 20 of the general journal. Date

Jan.

Transactions

1 5 7 10 15 15 20 25 28

30

Analyze

Sold $300 in merchandise plus a sales tax of $18 on account to Martha Adams, Sales Slip 777. Sold $1,500 in merchandise on account to Westwood High School Athletics, Sales Slip 778. Received $400 from Alex Hamilton on account, Receipt 345. Issued Credit Memorandum 102 to Martha Adams for $318 covering $300 in returned merchandise plus $18 sales tax. Recorded cash sales of $800 plus $48 in sales tax, Tape 39. Recorded bankcard sales of $900 plus $54 in sales tax, Tape 39. Received $1,500 from Westwood High School Athletics in payment of Sales Slip 778, Receipt 346. Sold $1,200 in merchandise plus sales tax of $72 on account to Helen Jun, Sales Slip 779. Granted a $106 sales allowance to Helen Jun, which includes $100 for damaged merchandise she kept and sales tax of $6, Credit Memorandum 103. Received $500 from a charge customer, Nate Moulder, in payment of his $500 account, Receipt 347. Calculate the sum of all the debits to the Sales Returns and Allowances account during January.

Chapter 14 Problems

378-413_CH14_868829.indd 406

9/12/05 3:11:09 PM

Problems

CHAPT E R 1 4

Problem 14–6 Posting Sales and Cash Receipts

SMART GUIDE

The January transactions for InBeat CD Shop are recorded on page 15 of the general journal.

Step–by–Step Instructions: Problem 14–6

Instructions Post the transactions to the general ledger and subsidiary ledger in your working papers. GENERAL JOURNAL DATE 1 2

20-Jan.

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

DESCRIPTION

POST. REF.

PAGE DEBIT

15

CREDIT 1

1 Cash in Bank Sales Discounts Accts. Rec./Alicia Alvarez Receipt 92 4 Accts. Rec./Dena Greenburg Sales Sales Tax Payable Sales Slip 60 6 Cash in Bank Sales Sales Tax Payable Tape 32 6 Cash in Bank Sales Sales Tax Payable Tape 32 8 Sales Returns and Allowances Sales Tax Payable Accts. Rec./ Dena Greenburg Credit Memorandum 15 10 Cash in Bank Sales Discounts Accts. Rec./Joe Montoya Receipt 93 15 Accts. Rec./Alicia Alvarez Sales Sales Tax Payable Sales Slip 61 27 Cash in Bank Accts. Rec./Chelsea Wright Receipt 94

3 8 8 00 1 2 00

2 3

4 0 0 00

5

7 3 5 00

6

7 0 0 00 3 5 00

7 8 9

2 1 0 0 00

10

2 0 0 0 00 1 0 0 00

11 12 13

3 1 5 0 00

14

3 0 0 0 00 1 5 0 00

15 16 17

7 0 0 00 3 5 00

18 19

7 3 5 00

20 21

1 3 5 8 00 4 2 00

22 23

1 4 0 0 00

24 25

4 2 0 00

26

4 0 0 00 2 0 00

27 28 29

1 3 6 5 00

30

1 3 6 5 00

33

Analyze

4

1. Select the problem set for InBeat CD Shop (Prob. 14–6). 2. Rename the company and set the system date. 3. Choose General Ledger from the Reports menu. 4. Print a General Ledger (GL) report. 5. Select the Accounts Receivable report area. 6. From the list on the right, select and print the Customer Ledgers report. 7. Compare each GL entry in your working papers to the GL report and Customer Ledgers report. 8. Use the GL report to complete the Analyze activity. 9. End the session.

31 32 33

Identify the customer with the highest balance at the end of January.

Chapter 14 Problems

378-413_CH14_868829.indd 407

407

9/12/05 3:11:11 PM

Problems

C H A P T ER 14

Problem 14–7 Recording Sales and Cash Receipts SMART GUIDE Step–by–Step Instructions: Problem 14–7 1. Select the problem set for Shutterbug Cameras (Prob. 14–7). 2. Rename the company and set the system date. 3. Enter all sales on account transactions using the Sales/ Invoicing option. 4. Process all credit memorandums using the Credit Memos option. 5. Record all cash receipts using the Receipts option. 6. Print a Sales Journal and a Cash Receipts Journal report. 7. Proof your work. Make any needed corrections. 8. Print a GL report to complete the Analyze activity. 9. End the session.

QuickBooks

Shutterbug Cameras had the following transactions during January. The partial chart of accounts for Shutterbug is shown here. General Ledger 101 Cash in Bank 115 Accounts Receivable 130 Supplies 215 Sales Tax Payable

Accounts Receivable Subsidiary Ledger DIA Diaz, Arturo NAK Nakata, Yoko FAS FastForward Productions SUL Sullivan, Heather

Instructions Record the transactions on page 5 of the general journal in your working papers. Date

Jan.

Transactions

1 3 7 12

13

PROBLEM GUIDE Step–by–Step Instructions: Problem 14–7 1. Restore the Problem 14-7.QBB file. 2. Enter all sales on account using the Create Invoice option. 3. Process all credit memorandums using the Create Credit Memos/Refunds option. 4. Record all cash receipts using the Receive Payments option. 5. Print a Journal report. 6. Proof your work. 7. Print a General Ledger report to complete the Analyze activity. 8. Back up your work.

408

401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

14 15 15 21

28

Analyze

Sold merchandise on account to Yoko Nakata for $250 plus a 4% sales tax of $10, Sales Slip 90. Received $50 in cash from the sale of supplies to Betty’s Boutique, Receipt 201. Sold $300 in merchandise plus a sales tax of $12 to Arturo Diaz on account, Sales Slip 91. Sold on account $1,500 in merchandise plus a sales tax of $60 to FastForward Productions, credit terms 2/10, n/30, Sales Slip 92. Issued Credit Memorandum 20 for $312 to Arturo Diaz, which includes $300 in merchandise returned by him plus sales tax of $12. Received a check for $260 from Yoko Nakata in full payment of his account, Receipt 202. Cash sales amounted to $2,500 plus $100 in sales tax, Tape 75. Bankcard sales were $3,000 plus $120 in sales tax, Tape 75. Received a check for $1,530 from FastForward Productions in payment of their $1,560 account balance less a cash discount of $30, Receipt 203. Granted Heather Sullivan a $104 allowance for damaged merchandise of $100 plus a 4% sales tax of $4, Credit Memorandum 21. Compute the net amount of sales tax for the month based on these transactions.

Chapter 14 Problems

378-413_CH14_868829.indd 408

9/12/05 3:11:14 PM

Problems Problem 14–8 Recording Sales and Cash Receipt Transactions River’s Edge Canoe & Kayak is a merchandising business in Wyoming. The partial chart of accounts follows: General Ledger 101 Cash in Bank 115 Accounts Receivable 135 Supplies 215 Sales Tax Payable

401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

Accounts Receivable Subsidiary Ledger ADV Adventure River Tours WILD Wildwood Resorts DRA Drake, Paul WU Wu, Kim

Instructions Record January transactions on page 10 of the general journal. Date

Jan.

Transactions

1 Sold $2,000 in merchandise on account to Wildwood Resorts, a tax-exempt agency, credit terms 3/15, n/30, Sales Slip 103. 5 Granted Wildwood Resorts a $150 credit allowance for defective merchandise, Credit Memorandum 33. 8 Received $485 from Adventure River Tours for $500 in merchandise sold to it on Dec. 27 less a 3% cash discount of $15, Receipt 96. 10 Sold $500 in merchandise plus a 5% sales tax of $25 to Paul Drake on account, credit terms 3/15, n/30, Sales Slip 104. 12 Received a check for $1,794.50 from Wildwood Resorts on account ($1,850 less a 3% cash discount of $55.50), Receipt 97. 15 Cash sales were $3,500 plus sales tax of $175, Tape 22. 15 Bankcard sales amounted to $4,000 plus sales tax of $200, Tape 22. 20 Sold to Adventure River Tours $75 in supplies. Cash received recorded on Receipt 98. 22 Granted Kim Wu $63 credit for $60 in damaged merchandise sold to her last month and 5% sales tax of $3 on the merchandise, Credit Memorandum 34. 25 Paul Drake sent a check for $510 in payment of his account. The account balance was $525 ($500 in merchandise and $25 sales tax). He took a 3% cash discount of $15 on the merchandise, Receipt 99.

Analyze

CHAPT E R 1 4 SMART GUIDE Step–by–Step Instructions: Problem 14–8 1. Select the problem set for River’s Edge (Prob. 14–8). 2. Rename the company and set the system date. 3. Enter all sales on account transactions using the Sales/ Invoicing option. 4. Process all credit memorandums using the Credit Memos option. 5. Record all cash receipts using the Receipts option. 6. Print a Sales Journal and Cash Receipts journal report. 7. Proof your work. 8. Print a GL report to complete the Analyze activity. 9. End the session.

Compute the amount of cash that would have been collected in January if customers had not taken any cash discounts.

Chapter 14 Problems

378-413_CH14_868829.indd 409

409

4/6/06 5:59:31 PM

Problems

C H A P T ER 14 CHALLENGE PROBLEM

SOURCE DOCUMENT PROBLEM Problem 14–9 Use the source documents in your working papers to complete this problem.

SMART GUIDE Step–by–Step Instructions: Problem 14–9 1. Select the problem set for Buzz Newsstand (Prob. 14–9). 2. Rename the company and set the system date. 3. Enter all sales on account transactions. 4. Process all credit memorandums. 5. Record all cash receipts. 6. Print the following reports: Sales Journal, Cash Receipts Journal, Customer Ledgers, and General Ledger. 7. Proof your work. 8. Use the GL report to complete the Analyze activity. 9. End the session.

Buzz Newsstand had the following transactions for the month of January. General Ledger 101 Cash in Bank 115 Accounts Receivable 135 Supplies 215 Sales Tax Payable

401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

Accounts Receivable Subsidiary Ledger ADK Adkins, Lee NAD Nadal, Saba JAV Java Shops Inc. ROL Rolling Hills Pharmacies

Instructions 1. Record the transactions on page 9 of the general journal. 2. Post each transaction to the appropriate general ledger and accounts receivable subsidiary ledger accounts. A partial general ledger and accounts receivable subsidiary ledger are included in the working papers. The current account balances are recorded in the accounts. Date

Jan.

Transactions

1

3

7

10

15 15 20

25 31

Analyze

410

Problem 14–9 Recording and Posting Sales and Cash Receipts

Lee Adkins returned $200 in damaged merchandise purchased on account last month, issued Credit Memorandum 10 for $212 ($200 in merchandise plus 6% sales tax of $12). Received a check from Rolling Hills Pharmacies for $2,256.62 in payment of its account of $2,300 less a 2% cash discount of $43.38, Receipt 75. Gave credit to Saba Nadal for the return of $300 in merchandise sold to him on account, plus sales tax of $18. Issued Credit Memorandum 11 for $318. Java Shops Inc. sent a check for $1471.70 in payment of its account of $1,500 less a 2% cash discount of $28.30, Receipt 76. Cash sales were $2,500 plus $150 in sales tax, Tape 25. Bankcard sales were $2,000 plus $120 in sales tax, Tape 25. Janson Lee, a neighboring store, needed supplies urgently. Sold it $40 in supplies and received cash from the sale, Receipt 77. Received a check for $636 from Lee Adkins on account, Receipt 78. Sold $3,000 in merchandise plus sales tax of $180 on account to Rolling Hills Pharmacies, Sales Slip 114. Calculate the net sales for January, which is Sales less Sales Discounts and Sales Returns and Allowances.

Chapter 14 Problems

378-413_CH14_868829.indd 410

4/6/06 5:59:32 PM

Winning Competitive Events

CHA PTER 14

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. If the merchandise is purchased for $1,000 on August 1, with terms of sale of 2/10, n/30, the amount due to the vendor on August 9 is a. $1,000. b. $990. c. $980. d. $20. 2. The journal entry for a cash receipt on account is a. debit Cash; credit Accounts Receivable. b. debit Cash; credit Accounts Payable. c. debit Accounts Payable; credit Cash. d. debit Accounts Payable; credit Accounts Receivable. 3. When a customer is given a price reduction on an item (for example, a damaged item), the bookkeeper will use which one of the following accounts? a. Purchase Allowance b. Purchase Discount c. Sales Discount d. Sales Allowance 4. To decrease the Sales Returns and Allowances account, the bookkeeper will a. credit the account. b. debit the account. c. both debit and credit the account. d. use the Purchase Returns and Allowances account.

Business Professionals of America MULTIPLE CHOICE 5. When bankcard sales are entered in the general journal, what account is debited? a. Bankcard Sales b. Cash c. Bankcard Sales Expense d. Sales

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 14. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

378-413_CH14_868829.indd 411

Chapter 14 Winning Competitive Events

411

10/13/05 10:30:27 PM

C H A P T ER 14 Critical Thinking

Accounting for a Merchandising Business

CASE

STUDY

Merchandising Business: Videos

ETHICS

Confidentiality

a mattoefr

))

$ )) Communicating ACCOUNTING

412

Real-World Applications and Connections

1. Define merchandising business. 2. Explain how a purchase made with a store credit card is different from a purchase made with a bank credit card. 3. A sales slip shows that $1,500 in merchandise has been sold and the sales tax rate is 4%. Compute the cash receipt. 4. How are a bank credit card and a debit card similar? How are they different? 5. Your accounting supervisor has instructed you to verify the accuracy of the day’s bank credit card sales and then deposit that amount into the business checking account. Summarize what you need to do. 6. Evaluate the practice of using a contra account to record sales returns and allowances. Felix Andersen is a film buff. His business, Video Source, specializes in foreign titles and classic film collections. Video Source uses a manual accounting system. Sales are recorded from cash register tapes at the end of the day. Felix is thinking of updating to an electronic cash register that records sales information directly into a computerized accounting system. INSTRUCTIONS 1. Describe the benefits of converting to an electronic system. 2. Explain how an analysis of sales would help when making decisions about what types of videos to stock. Imagine that you work as an accounting clerk for a fast-food franchise like Taco Bell. You have access to all of the accounting records for the business. A friend of yours has promised to hire you as an accountant when he opens his own Mexican food restaurant. He has asked you to share information about Taco Bell’s sales and expenses. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Presenting Your Case You and your best friend, Inga Swenson, graduated from a prestigious art school. You have a degree in art history and business management; Inga has a degree in fine art. Inga is an award-winning weaver and creates wall hangings that are extremely popular in your community. Together you decide to form a business partnership. You want to open a retail store. Inga wants to sell directly to the customers at fairs and art shows. Draft a report to Inga that explains why selling art through a retail store is more profitable than seasonal shows and fairs.

Chapter 14 Real-World Applications and Connections

378-413_CH14_868829.indd 412

9/12/05 3:11:22 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Allocating Resources When you operate a business, you must constantly evaluate the effective use of resources, including time, money, materials, space, and staff. You own Retro Café, a late-night spot for young professionals and college students, open 11 a.m. until midnight. Your review of the month’s financial reports reveals that the café is showing a net loss for the third month in a row. INSTRUCTIONS Design a form to gather opinions on the menu, staffing, and operating hours. What are the staffing implications if most sales occur after 3 p.m.?

International Product Life Cycle The international product life cycle (IPLC) theory explains how a product that is an export eventually becomes an import. At first sales are strong when a U.S. company sells to both U.S. and foreign consumers. Then foreign producers make the item at a lower cost, and U.S. exports decline. Finally foreign competitors undercut U.S. prices, and consumers buy the less expensive imported product. INSTRUCTIONS Use a product such as a DVD player to illustrate the IPLC.

Your Budget Businesses plan ahead, estimating their revenue and expenses. It is important for you to plan ahead and spend your money wisely. This is accomplished by developing a budget, which is a plan for spending money. PERSONAL FINANCE ACTIVITY Develop a weekly budget for a person your age. Create two columns on a sheet of paper. Label one Income and the other Expenses. List all sources of income for the week in the first column and the planned spending in the second. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 14.

Dear Fellow Stockholders Letter Public corporations publish annual reports giving financial and other information they want to make public. One item in most annual reports is a letter from the company’s top executive officer. Safe and Secure INSTRUCTIONS When buying online, always use an Use the PETsMART Dear Fellow Stockholders letter Internet-friendly credit card. Visit in the PETsMART annual report in Appendix F glencoeaccounting to answer these questions: .glencoe.com and click 1. Name three measures of PETsMART’s 2003 on Student Center. Click on WebQuest and select Unit 4 to financial results. continue your Internet project. 2. Would this letter influence your decision to purchase PETsMART stock? Why or why not?

glencoeaccounting.glencoe.com

378-413_CH14_868829.indd 413

CHAPT E R 1 4

Chapter 14 Real-World Applications and Connections

413

4/6/06 5:59:38 PM

CH A P T ER 15

Accounting for Purchases and Cash Payments BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the procedures for processing a purchase on account.

2.

Describe the accounts used in the purchasing process.

1. 2. 3. 4.

3.

Identify controls over cash.

4.

Analyze transactions relating to the purchase of merchandise.

5.

6. 7.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING PURCHASES

Record a variety of purchases and cash payment transactions.

Suncoast Motion Picture Company

Post to the accounts payable subsidiary ledger.

the DVD business, used is often as good as new. Sales of

Define the accounting terms introduced in this chapter.

revenue for retailers like Suncoast Motion Picture Company,

Why It’s Important ▲

The purchasing process results in a large outflow of cash.

If you were searching for The Lord of the Rings: The Return of the King DVD, would you care if it was new or used? In “previously viewed” DVDs have become a huge source of attracting customers by providing more choices. Suncoast Motion Picture Company purchases used DVDs for resale. Customers either sell them to Suncoast for cash or trade in older titles for new or different ones. Suncoast stores also offer movie memorabilia like posters, T-shirts, and books. Movie posters and T-shirts are purchased from various commercial printers.

What Do You Think? If Suncoast purchased 5,000 posters from a commercial printer on credit, which accounts do you think would be affected?

414

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 414

9/12/05 3:12:30 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Have you ever gone shopping only to find that the store is out of the item you wanted? The store may have had a big sale and not yet received new merchandise. Stores order new items to replace the ones sold. In this chapter you will learn about the purchasing process and how to record purchases of merchandise and other items.

glencoeaccounting.glencoe.com

414-447_CH15_868829.indd 415

Personal Connection 1. If you work for a retail store, does it usually have most of its items in stock? 2. If it were up to you to decide on a new item to offer to your customers, what would it be?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 15.

415

9/12/05 3:12:36 PM

SECTION 1

BEFORE YOU

READ

Main Idea

Merchandising businesses follow an orderly process for purchasing merchandise, supplies, and equipment.

Read to Learn… ➤ the four stages in

purchasing items for a business and the processes and documents related to each stage. (p. 416) ➤ the purpose of the Purchases account. (p. 419)

Key Terms

purchase requisition purchase order packing slip processing stamp purchases discount discount period Purchases account cost of merchandise

Purchasing Items Needed by a Business In Chapter 14 you learned that the primary source of income for a merchandising business is from the sale of its merchandise. However, to sell merchandise, a business must first buy the items. The items you find for sale at Wal-Mart—housewares, clothing, sporting goods, jewelry—are all purchased from wholesalers and suppliers. In this chapter you will learn how to analyze transactions relating to the purchase of merchandise.

The Purchasing Process What Are the Four Stages of Purchasing? All businesses, from the corner grocery store to a giant international corporation, are involved in the purchasing process. Retail businesses need shopping bags for customers, sales slips, and cash register tapes. They also need to purchase supplies, equipment, and merchandise. The purchase of supplies, equipment, and merchandise is divided into four stages: • • • •

requesting needed items ordering from a supplier verifying items received processing the supplier’s invoice

Let’s take a look at each of these stages.

Requesting Needed Items In a small business, the owner does all the buying. In a large business, a separate purchasing department buys items for the entire company. When the company needs to buy equipment or supplies, or when the inventory of merchandise on hand is low, a purchase requisition is prepared. A purchase requisition is a written request to order a specified item or items. Usually a purchase requisition is a prenumbered, multicopy form. The manager of the department requesting the item(s) approves the purchase requisition. Then the original copy of the purchase requisition goes to the purchasing department or the purchasing agent. The person making the request keeps a copy. Figure 15–1 shows the purchase requisition form used by On Your Mark Athletic Wear.

Ordering from a Supplier A purchase order is a written offer to a supplier to buy specified items. Much of the information on the purchase order comes directly 416

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 416

9/12/05 3:12:57 PM

Figure 15–1 Purchase Requisition

ON YOUR MARK ATHLETIC WEAR PURCHASE REQUISITION

FOR DEPARTMENT NOTIFY

DATE WANTED

Dec. 15, 20--

Shoes

Vic Ventura

ON DELIVERY

QUANTITY

20 Pair 10 Pair 10 Pair 10 Pair ORDER FROM

DATE

NO. 9421 Nov. 12, 20--

DESCRIPTION

STOCK NO.

Soft Cushion, White Soft Cushion, Black Low Cut, White Low Cut, Black

94682 94788 94281 94666

Pro Runner Warehouse

APPROVED BY

AS YOU

Jennifer Mack

Key Point

SHOE DEPARTMENT MANAGER

from the purchase requisition. Other information may be obtained from the supplier’s catalog. Look at the purchase order prepared by On Your Mark in Figure 15–2. The purchase order contains: 1. 2. 3. 4.

5. supplier’s name and address 6. date needed 7. shipping method (optional)

quantity description unit price total cost

The purchase order is a prenumbered multicopy form. The original of the purchase order goes to the supplier. One copy goes to the department requesting the items. The purchasing department keeps another copy. ON YOUR MARK

PURCHASE ORDER

ATHLETIC WEAR

No. 9784

595 Leslie Street, Dallas, TX 75207

To

Pro Runner Warehouse 5 22009 Ben White Blvd. Austin, TX 78705

Quantity

20 pair 10 pair 10 pair 10 pair

1

Item

Date: Date Needed:

2

November 15, 20-December 15, 20--

Unit Price

Soft Cushion: White, #94682 Soft Cushion: Black #94788 Low Cut: White, #94281 Low Cut: Black, #94666

$ 50.00 50.00 40.00 40.00 Total

3

READ

6

Total

Forms Used in Purchasing The purchase requisition stays inside the company. The purchase order goes outside the company.

AS YOU

READ

Compare and Contrast Purchase Requisition and Purchase Order How are a purchase requisition and a purchase order similar? How are they different?

4

$ 1,000.00 500.00 400.00 400.00 $ 2,300.00

Figure 15–2 Purchase Order

Verifying Items Received Note that a purchase order is only an offer to buy items. Until the items are actually received, the buyer does not know whether or not the supplier has accepted the offer. A supplier may not be able to fill the purchase order

Section 1 Purchasing Items Needed by a Business

414-447_CH15_868829.indd 417

417

9/12/05 3:13:00 PM

MATH HINTS Estimate by Rounding When you need an estimate of an answer to check for reasonableness, you can use rounding as shown: 4,682 5,000
14,289
14,000 18,971 19,000 Round to the nearest thousand and add to get an estimate of 19,000. Because this is close to the calculated sum of 18,971, the answer is reasonable.

AS YOU

READ

Key Point Purchase Order A purchase order does not require a journal entry. It is only an offer to buy.

because an item is out of stock or has been discontinued. The mailing of a purchase order, therefore, does not require a journal entry. A supplier accepts a purchase order by shipping the items requested and billing the buyer for these items. When a supplier ships to a buyer, the shipment includes a packing slip , which is a form that lists the items included in the shipment. When a shipment arrives, the buyer immediately unpacks and checks the contents against the quantities and items listed on the packing slip. If the shipment contents do not agree with those listed on the packing slip, a note about the differences is made on the packing slip. The packing slip is then sent to the accounting department to be checked against both the purchase order and the supplier’s bill. A buyer does not have to pay for items that it did not receive, or that were damaged, or not ordered and returned to the supplier.

Processing the Supplier’s Invoice When it ships to a buyer, the supplier prepares a bill called an invoice. It lists the credit terms; the quantity, description, unit price, and total cost of the items shipped; the buyer’s purchase order number; and the method of shipment. The supplier sends the invoice directly to the buyer’s accounting department, where it is date stamped to indicate when the invoice was received. The accounting clerk checks each detail (item, quantity, and price) on the invoice against the packing slip and the purchase order. This procedure verifies that the buyer is billed for the quantities and items actually ordered and received and that the prices are correct. Once verified, the invoice is the source document for a journal entry. Before the invoice is recorded, a processing stamp is placed on the invoice to enter the following information: the date the invoice is to be paid, the discount amount, if any, the amount to be paid, and the check number. The first three lines on the processing stamp are completed at the time the invoice is received. The check number is entered later, when the check is issued. Look at the invoice in Figure 15–3. Notice the date stamp, which indicates when the invoice was received. The processing stamp information is complete except for the check number, which means that the invoice has been verified but not yet paid. When a small business grows too large for one person to handle all the financial responsibilities, it may adopt the voucher system to provide internal control. A voucher is a document that serves as written authorization for a cash payment. The business prepares a voucher for every invoice received. The voucher, with invoice attached, is circulated within the company for approval signatures. The approved voucher is authorization to issue a check.

Purchases Discounts Suppliers frequently offer charge customers a cash discount for early payment. For the buyer this discount is called a purchases discount . A purchases discount and cash discount are calculated in the same way.

418

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 418

9/12/05 3:13:03 PM

INVOICE NO. 7894

REC’D

TO

DEC.

On Your Mark Athletic Wear 595 Leslie Street Dallas, TX 75207

QTY.

-14, 20 DATE: ORDER NO.: SHIPPED BY: TERMS:

ITEM

20 pair 10 pair 10 pair 10 pair

Due Date: Discount: Net Amount:

Dec. 14, 20-9784 Federal Trucking 2/10, n/30

UNIT PRICE

$ 50.00 50.00 40.00 40.00

Soft Cushion: White, #94682 Soft Cushion: Black, #94788 Low Cut: White, #94281 Low Cut: Black, #94666 Total

12/24 $ 46.00 $ 2,254.00

Figure 15–3 Invoice

TOTAL

$ 1,000.00 500.00 400.00 400.00 $ 2,300.00

Check No.:

For example, On Your Mark purchased $2,300 of merchandise on account from Pro Runner Warehouse. Figure 15–3 shows the invoice dated December 14. The credit terms are 2/10, n/30. If On Your Mark pays for the merchandise on or before December 24, it may deduct 2% of the value of the merchandise. The 10 days, called the discount period , is the time within which an invoice must be paid if the discount is taken. If On Your Mark does not pay for the merchandise within the discount period, it pays the net, or total amount, within 30 days of the invoice date. On Your Mark can save $46 if it pays the invoice within the 10-day discount period ending December 24. The end of the discount period can be determined by adding 10 days to the date of the invoice (December 14
10 days  December 24). The amount to be paid within the discount period is calculated as follows: 1.

Merchandise Purchased
$2,300 Invoice Amount

2.

$2,300




Discount Rate



Discount

.02



$46

 Discount Amount 

Amount Paid Within Discount Period

$46

$2,254





AS YOU

READ

Key Point Discount Period The discount period is calculated from the date of the invoice, not the date the invoice is received.

The Purchases Account What Is the Purpose of the Purchases Account?

Purchases

When a business buys merchandise to sell to customers, the cost of Debit the merchandise is recorded in the Purchases account . The Purchases
account is a temporary account, classified as a cost of merchandise Increase Side account. Cost of merchandise accounts contain the actual cost to the Normal Balance business of the merchandise sold to customers. Merchandise that is purchased for resale is a cost of doing business. Therefore, the Purchases account follows the rules of debit and credit for expense accounts. The Purchases account is increased by debits and decreased by credits. The normal balance of the Purchases account is a debit.

Credit  Decrease Side

Section 1 Purchasing Items Needed by a Business

414-447_CH15_868829.indd 419

419

9/12/05 3:13:13 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table similar to this one to identify the four stages in the purchasing process, the activity involved in each stage, and the document used in that stage.

3TAGE

3TAGE4ITLE

!CTIVITY

$OCUMENT

   

Do the Math As a new accountant for the South City School District, one of your primary duties involves preparing purchase requisitions. For each item ordered, you compute the extensions (quantity ordered multiplied by the cost per unit). On a separate sheet of paper, calculate the extensions for each of the following items ordered. Quantity 1 5 2 100 4 doz.

Item Description Box of copy paper Reams of art paper Globes No. 2 pencils Transparency markers

Unit Price $34.00/box $12/ream $55/ea. $.12/ea. $6.50/doz.

Problem 15–1 Analyzing a Purchase Order Instructions Analyze the purchase order shown here and answer the following questions in your working papers.

PURCHASE ORDER

No. 7894

To

Westmoreland Paint and Supply Co. 1714 Peak Road Cleveland, OH 44109

1. What company ordered the merchandise? 4 gal. Exterior paint, white, #682 2. What company was 4 gal. Exterior paint, gray, #788 asked to supply the 6 gal. Exterior paint, brown, #281 merchandise? 6 gal. Exterior paint, beige, #66 5 gal. Exterior paint, peach, #711 3. What is the purchase order number? 4. When was the purchase order prepared? 5. When is the merchandise needed? 6. How many gallons of paint were ordered? 7. How many different colors of paint were ordered? 8. What colors were ordered? 9. How much does each gallon of paint cost? 10. What is the total cost of the order? Quantity

420

Date: Date Needed:

Item

November 15, 20-December 1, 20--

Unit Price

$ 20.00 20.00 20.00 20.00 20.00 Total

Total

$ 80.00 80.00 120.00 120.00 100.00 $ 500.00

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 420

9/12/05 3:13:16 PM

SECTION 2

Analyzing and Recording Purchases on Account

Small retailers may rely on a bookkeeper or part-time accountant to record purchase transactions. Large companies such as Kohl’s Department Store can have thousands of suppliers. They need an entire accounts payable department to verify invoices and correct any discrepancies before recording purchases in the accounting records.

Purchases of Assets on Account How Are the Purchases of Assets on Account Recorded? Regardless of its type, size, or purpose, a retail business needs to buy supplies, equipment, and other assets. Most importantly, it buys merchandise to resell. Merchandise can be bought on a cash basis or on account. The business posts purchases on account in the accounts payable subsidiary ledger.

The Accounts Payable Subsidiary Ledger In Chapter 14 you learned that when a business sells to many customers on credit, using an accounts receivable subsidiary ledger is efficient. Likewise, a business that purchases from many suppliers on account finds it efficient to set up an accounts payable subsidiary ledger with an account for each supplier or creditor. These individual accounts are summarized in the general ledger controlling account, Accounts Payable. The balance of the Accounts Payable controlling account and the total of all account balances in the accounts payable subsidiary ledger must agree after posting.

BEFORE YOU

READ

Main Idea

Individual accounts payable transactions are posted to a subsidiary ledger.

Read to Learn… ➤ how to journalize

purchases on account. (p. 421) ➤ how to journalize and post purchases returns and allowances. (p. 424)

Key Terms

accounts payable subsidiary ledger tickler file due date purchases return purchases allowance debit memorandum

The Accounts Payable Subsidiary Ledger Form The ledger account form in Figure 15–4 on page 422 is used for both the accounts payable subsidiary ledger and the accounts receivable subsidiary ledger. The ledger account form has lines for the creditor’s name and address. A manual accounting system arranges the accounts payable subsidiary ledger in alphabetical order with no account numbers. A computerized accounting General Ledger Accounts Payable—controlling account

$4,500

Accounts Payable Subsidiary Ledger Individual Accounts Within Ledger: Sandals Etc. $ 900 Shoe Warehouse 2,100 Shoe Wholesale Inc. 1,000 Store Supply Shop 500 Total

Controlling account balance equals total of accounts in subsidiary ledger. $4,500

Section 2 Analyzing and Recording Purchases on Account

414-447_CH15_868829.indd 421

421

9/12/05 3:13:21 PM

NAME ADDRESS DATE

DESCRIPTION

Figure 15–4 Subsidiary Ledger Account Form

system assigns each creditor an account number. The ledger account form POST. DEBIT CREDIT BALANCE REF. has three amount columns. The normal balance of an Accounts Payable subsidiary account is a credit. The Debit column for payments to creditors records decreases to the account. The Credit column for purchases on account is for increases to it. The Balance column shows the amount owed to the creditor.

Merchandise Purchases on Account On Your Mark’s first purchase transaction in December involves a purchase of merchandise on account. When this entry is recorded in the journal, a diagonal line in the Posting Reference column indicates that the credit amount is posted in two places. • •

First post to the Accounts Payable controlling account in the general ledger. Then post to the Pro Runner Warehouse account in the accounts payable subsidiary ledger.

After the invoice from Pro Runner Warehouse is journalized, it is put in a tickler file , which has a folder for each day of the month. Each invoice is placed in a folder according to its due date , the date it is to be paid. For example, an invoice due December 24 is placed in the “24” folder. INVOICE NO. 7894

B u s i n e s s Tr a n s a c t i o n On December 14 On Your Mark purchased $2,300 in merchandise on account from Pro Runner Warehouse, Invoice 7894.

EC. C’D D

RE TO

On Your Mark Athletic Wear 595 Leslie Street Dallas, TX 75207

QTY.

20 pair 10 pair 10 pair 10 pair

ITEM

Identify

Classify

/

DEBIT-CREDIT RULE

422

Discount:

12/24 $ 46.00 $ 2,254.00

Dec. 14, 20-9784 Federal Trucking 2/10, n/30

UNIT PRICE

$ 50.00 50.00 40.00 40.00

Soft Cushion: White, #94682 Soft Cushion: Black, #94788 Low Cut: White, #94281 Low Cut: Black, #94666 Due Date:

ANALYSIS

-14, 20 DATE: ORDER NO.: SHIPPED BY: TERMS:

Total

TOTAL

$ 1,000.00 500.00 400.00 400.00 $ 2,300.00

1. The accounts Net Amount: Check No.: affected are Purchases, Accounts Payable (controlling), and Accounts Payable—Pro Runner Warehouse (subsidiary). 2. Purchases is a cost of merchandise account. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are liability accounts. 3. Purchases is increased by $2,300. This is the cost of the merchandise purchased. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are increased by $2,300.

4. Increases to cost of merchandise accounts are recorded as debits. Debit Purchases for $2,300. 5. Increases to liability accounts are recorded as credits. Credit Accounts Payable (controlling) for $2,300. Also credit Accounts Payable—Pro Runner Warehouse (subsidiary) for $2,300.

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 422

9/12/05 3:13:25 PM

6.

T ACCOUNTS

Accounts Payable

Purchases Debit
2,300

Credit
2,300

Debit 

Credit 

Accounts Payable Subsidiary Ledger Pro Runner Warehouse Credit
2,300

Debit 

JOURNAL ENTRY

7. GENERAL JOURNAL DATE 1 2 3 4

PAGE

POST. REF.

DESCRIPTION

DEBIT

20-Dec. 14 Purchases Accts. Pay./Pro Runner Whs. Invoice 7894

21

CREDIT 1

2 3 0 0 00

2

2 3 0 0 00

3 4

Other Purchases on Account On Your Mark purchases assets other than merchandise, such as supplies, computer equipment, and store equipment. The following example illustrates the purchase of store equipment on account.

CHAMPION STORE SUPPLY

B u s i n e s s Tr a n s a c t i o n

Dallas, TX 75207

On December 15 On Your Mark received Invoice 3417, dated December 13, from Champion Store Supply for store equipment bought on account for $1,200, terms n/30.

TO

On Your Mark Athletic Wear 595 Leslie Street Dallas, TX 75207

QTY.

3 1

INVOICE NO. 3417

20-DATE: C. 15, ORDER NO.: SHIPPED BY: TERMS:

DE REC’D

47249 Randall Parkway

ITEM

Dec. 13, 20-9795 Federal Trucking n/30

$ 300.00 300.00 Total

ANALYSIS

Identify

Classify

/

DEBIT-CREDIT RULE

Due Date:

$

900.00 300.00 $ 1,200.00

1/12

1. The accounts affected $0.00 Discount: Net Amount: $1,200.00 are Store Equipment, Check No.: Accounts Payable (controlling), and Accounts Payable—Champion Store Supply (subsidiary). 2. Store Equipment is an asset account. Accounts Payable (controlling) and Accounts Payable—Champion Store Supply (subsidiary) are liability accounts. 3. Store Equipment is increased by $1,200. Accounts Payable (controlling) and Accounts Payable—Champion Store Supply (subsidiary) are increased by $1,200.

4. Increases to asset accounts are recorded as debits. Debit Store Equipment for $1,200. 5. Increases to liability accounts are recorded as credits. Credit Accounts Payable (controlling) for $1,200. Also credit Accounts Payable— Champion Store Supply (subsidiary) for $1,200.

Section 2 Analyzing and Recording Purchases on Account

414-447_CH15_868829.indd 423

TOTAL

UNIT PRICE

Corner Shelf Units Shirt Rack

423

9/12/05 3:13:26 PM

6.

T ACCOUNTS

Store Equipment Debit
1,200

Accounts Payable

Credit 

Credit
1,200

Debit 

Accounts Payable Subsidiary Ledger Champion Store Supply Credit
1,200

Debit 

7.

JOURNAL ENTRY

GENERAL JOURNAL DATE

5 6 7

DESCRIPTION

Dec. 15 Store Equipment Accts. Pay./Champion Store Invoice 3417

POST. REF.

PAGE DEBIT

21

CREDIT

1 2 0 0 00

5

1 2 0 0 00

8

6 7 8

Purchases Returns and Allowances How Are Purchases Returns and Allowances Recorded? Occasionally, a business buys merchandise that, upon inspection, is unacceptable. A purchases return occurs when a business returns merchandise to the supplier for full credit. A purchases allowance occurs when a business keeps less than satisfactory merchandise and pays a reduced price. A debit memorandum , or debit memo, is used to notify suppliers (creditors) of a return or to request an allowance. The “debit” in debit memorandum indicates that the creditor’s account will be debited, or decreased. Figure 15–5 Figure 15–5 shows a debit memorandum prepared by On Your Mark. Debit Memorandum As you can see, the debit memorandum is prenumbered and has DEBIT MEMORANDUM No. 51 spaces for the creditor’s name and December 16, 20-address and the invoice number. FL610 ON YOUR MARK The original is sent to the crediATHLETIC WEAR tor. The copy is the source docu595 Leslie Street, Dallas, TX 75207 ment for the journal entry. FastLane Athletics A debit memorandum always 35992 Fletcher Blvd. #334 results in a debit (decrease) to the Boston, MA 02206 Accounts Payable controlling account in the general ledger and 5 pair All-Star Athletic Shoes $ 40.00 $ 200.00 to the creditor’s account in the subsidiary ledger. The account credited depends on whether the debit memorandum is for merchandise or another asset. Date:

Invoice No.:

To:

This day we have debited your

account as follows:

Quantity

424

Item

Unit Price

Total

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 424

9/12/05 3:13:27 PM

The Purchases Returns and Allowances account is used to record the return of merchandise to a supplier or to record an allowance. It is classified as a contra cost of merchandise account to the Purchases account. The normal balance of Purchases is a debit, so the normal balance of Purchases Returns and Allowances is a credit. This relationship is shown in these T accounts.

Purchases Credit  Decrease Side

Debit
Increase Side Normal Balance

Purchases Returns and Allowances Debit  Decrease Side

Credit
Increase Side Normal Balance

AS YOU

READ

Instant Recall Contra Account A contra account is an account whose balance is a decrease to another related account.

Recording a Purchases Returns and Allowances Transaction On Your Mark prepared and sent the debit memorandum shown in Figure 15–5.

DEBIT MEMORANDUM

No. 51 Date:

Invoice No.:

ON YOUR MARK

December 16, 20-FL610

ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207

B u s i n e s s Tr a n s a c t i o n

To:

On December 16 On Your Mark issued Debit Memorandum 51 for the return of $200 in merchandise purchased on account from FastLane Athletics. ANALYSIS

Identify

Classify

/

FastLane Athletics 35992 Fletcher Blvd. #334 Boston, MA 02206

Quantity

5 pair

Item

All-Star Athletic Shoes

This day we have debited your account as follows:

Unit Price

$ 40.00

Total

$ 200.00

1. The accounts affected are Accounts Payable (controlling), Accounts Payable—FastLane Athletics (subsidiary), and Purchases Returns and Allowances. 2. Accounts Payable (controlling) and Accounts Payable—FastLane Athletics (subsidiary) are liability accounts. Purchases Returns and Allowances is a contra cost of merchandise account. 3. Accounts Payable (controlling) and Accounts Payable—FastLane Athletics (subsidiary) are decreased by $200. Purchases Returns and Allowances is increased by $200.

DEBIT-CREDIT RULE

4. Decreases to liability accounts are recorded as debits. Debit Accounts Payable (controlling) for $200. Also debit Accounts Payable—FastLane Athletics (subsidiary) for $200. 5. Increases to contra cost of merchandise accounts are recorded as credits. Credit Purchases Returns and Allowances for $200.

T ACCOUNTS

6.

Accounts Payable Debit  200

Credit


Purchases Returns and Allowances Debit 

Credit
200

Accounts Payable Subsidiary Ledger FastLane Athletics Debit  200

Credit


Section 2 Analyzing and Recording Purchases on Account

414-447_CH15_868829.indd 425

425

9/12/05 3:13:28 PM

7.

JOURNAL ENTRY

GENERAL JOURNAL DATE

PAGE

POST. REF.

DESCRIPTION

DEBIT

Dec. 16 Accts. Pay./FastLane Athletics Purchases Returns and Allow. Debit Memorandum 51

8 9 10

21

CREDIT

2 0 0 00

8

2 0 0 00

9 10

11

11

Posting to the Accounts Payable Subsidiary Ledger In Figure 15–6 note how the transaction is posted. The $200 debit is posted to two accounts—the Accounts Payable controlling account and the accounts payable subsidiary ledger account, FastLane Athletics. After it is posted to Accounts Payable, the account number 201 is entered to the left of the diagonal in the Posting Reference column. After the amount is posted to FastLane Athletics, a check mark (✓) is entered to the right of the diagonal line. GENERAL JOURNAL DATE

8

Dec.

9 10

POST. REF.

DESCRIPTION

21

PAGE

201 16 Accounts Payable/FastLane Athletics ✓ 515 Purchases Returns and Allowances Debit Memorandum 51

DEBIT

CREDIT

2 0 0 00

8

2 0 0 00

9 10

11

ACCOUNT Accounts Payable DATE

20-Dec.

ACCOUNT NO. 201 BALANCE

POST. DESCRIPTION REF.

1 Balance 14 15 16

DEBIT

✓ G21 G21 G21

CREDIT

DEBIT

6 8 9 9

2 3 0 0 00 1 2 0 0 00 2 0 0 00

ACCOUNT Purchases Returns and Allowances DATE

20-Dec.

POST. DESCRIPTION REF.

1 Balance 16

CREDIT

300 600 800 600

00 00 00 00

ACCOUNT NO. 515 BALANCE

DEBIT

✓ G21

CREDIT

DEBIT

CREDIT

1 6 0 0 00 1 8 0 0 00

2 0 0 00

FastLane Athletics ADDRESS 35992 Fletcher Blvd. #334, Boston, MA 02206 NAME

DATE

Figure 15–6 Posting to General Ledger and Accounts Payable Ledger 426

20-Dec.

DESCRIPTION

1 16

POST. REF.

DEBIT

✓ G21

2 0 0 00

CREDIT

BALANCE

1 0 0 0 00 8 0 0 00

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 426

9/12/05 3:13:30 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a flowchart like this one and write the correct labels in the boxes and next to the arrows. Create the labels from these terms: general ledger, invoice, journal, posted to, recorded in, subsidiary ledger. Terms can be used more than once.

Do the Math Alpha Enterprises received an invoice dated May 2 for the purchase of $3,000 of merchandise. Terms of sale are 2/10, n/30. Answer the following questions: 1. What is the due date of the invoice? 2. What is the amount of the cash discount? 3. What is the net amount to be paid? 4. If the discount period is missed, what is the last day the invoice is to be paid? How much would be paid?

Problem 15–2 Recording Purchases Transactions Instructions Record the following purchases transactions on page 7 of the general journal in your working papers. Date

Transactions

Sept. 2 Purchased $900 in merchandise on account from Sunrise Novelty Supply, Invoice SN110. 7 Issued Debit Memorandum 18 to Sunrise Novelty Supply for a $50 allowance granted on damaged merchandise.

Problem 15–3 Analyzing a Source Document As an accounting intern for Kaleidoscope Comics, you perform a variety of accounting tasks. The accountant hands you this debit memo.

Instructions

DEBIT MEMORANDUM

No. 559 Date:

Invoice No.:

To:

Randall’s Cafe and Bookstore

November 12, 20-2260

This day we have debited your

1. Analyze the source document. Determine which accounts are to be debited or credited. 2. Record the entry on page 15 of the general journal in your working papers.

account as follows:

Quantity

1 dz 1 dz

Item

Best of Dilbert Banzai Anime

Unit Price

$ 7.50 8.50

Section 2 Analyzing and Recording Purchases on Account

414-447_CH15_868829.indd 427

Total

$ 7.50 8.50 $ 16.00

427

9/12/05 3:13:36 PM

Accounting Careers in Focus ANALYST

Morgan Stanley, Teaneck, New Jersey Anwar Beatty Q: What has helped you in your career? A: Networking. I always try to get to know people in different positions and fields and learn what they do.

Q: What are your day-to-day responsibilities? A: I help maintain the in-house computer systems for one of our business groups. I conduct systems checks, help resolve user issues, and carry through enhancements that allow for greater productivity and efficiency. In addition, I’m responsible for compiling a variety of reports and filing them with senior management and the Securities and Exchange Commission.

.. Tips from . ga When reviewin me, su re s job candidate’ managers g in ir h 53 percent of nt first for releva say they look ur u can build yo experience. Yo er rough volunte work history th d an s, , internship opportunities signments. temporary as

Q: What is the biggest challenge you face in your job? A: Learning aspects of the finance industry that were not part of my coursework in school. Education should be ongoing—you must be able to pick up new things, digest them, and apply them the next day.

Q: What advice would you give students who are interested in becoming analysts? A: Get involved with professional associations. They can help prepare you for your first job. They’ll also help you build professional skills that you’ll need in the business world. If you do your research, you’ll find that there are a great deal more opportunities available in finance than you might realize. I never thought I would be involved in this aspect of the business, for example.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Work with stock traders to monitor stock positions and companies’ earnings reports; interact with personnel from various financial institutions to resolve customer queries and problems concerning stock trades. Training or Education Needed: A bachelor’s degree in accounting or finance is preferred. Aptitudes, Abilities, and Skills: Strong communication skills, organizational skills, and multitasking abilities. Salary Range: $30,000 to $50,000 depending on experience, level of responsibility, and firm size. Career Path: Start as an entry-level analyst, and then assume roles of increasing responsibility.

Thinking Critically 428

How might you acquire the basic accounting experience you need for an entry-level position?

Chapter 15 Accounting Careers in Focus

414-447_CH15_868829.indd 428

9/12/05 3:13:38 PM

SECTION 3

Analyzing and Recording Cash Payments

If cash is the lifeblood of a business, the accounting department is its heart. All cash entering or leaving a business is “pumped” through the accounting department at some time. If it is not, cash losses can occur.

How Does a Business Manage Cash Payments? Earlier chapters explained ways to guard against losses of cash receipts. For example, businesses should deposit all cash receipts in a bank account. Businesses must also properly manage cash payments so that losses do not occur. The following are procedures to manage cash payments:

• • •

READ

Main Idea

Controls over Cash

•

BEFORE YOU

Require proper authorization of all cash payments. Support each payment with an approved source document, such as an invoice. Write checks for all payments. Allow only authorized persons to sign checks. Use prenumbered checks. Retain and account for spoiled checks. Mark these checks “Void,” and file them in sequence.

Cash Payment Transactions How Does a Merchandising Business Make Cash Payments? Businesses buy merchandise and other assets on account or by paying cash. On Your Mark makes all cash payments by check. When it makes a cash payment, the clerk records the details on the check stub. The check stub is the source document for the journal entry. Then the clerk prepares a check, which an authorized person signs. Let’s look at how to record several types of cash payment transactions that occur frequently.

Recording Cash Purchase of Insurance Businesses buy insurance to protect against losses from hazards such as theft, fire, and flood. Insurance policies cover varying time periods, such as six months or one year. The cost of insurance protection is called the premium . A premium is paid in advance at the beginning of the covered period. Insurance paid in advance is an asset because until the insurance protection expires, it represents a benefit to the company. The insurance premium is recorded in the asset account, Prepaid Insurance.

The accounting department is responsible for making the cash payments for the business.

Read to Learn… ➤ the procedures for

managing cash payments. (p. 429) ➤ how to record the different types of cash payment transactions. (p. 429)

Key Terms

premium FOB destination FOB shipping point bankcard fee

AS YOU

READ

Instant Recall Internal Controls One of the key purposes of internal controls is to protect cash and other assets.

Section 3 Analyzing and Recording Cash Payments

414-447_CH15_868829.indd 429

429

9/12/05 3:13:42 PM

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

1001

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

Dec. 17

DATE

On December 17 On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

PAY TO THE ORDER OF

Keystone Insurance Company

20 -$ 1,500.00

One thousand five hundred and no/100

DOLLARS

Security National Bank DALLAS, TEXAS

Michael Brown

MEMO


421022523
727596 1001

ANALYSIS

Identify Classify /

1. The accounts affected are Prepaid Insurance and Cash in Bank. 2. Both Prepaid Insurance and Cash in Bank are asset accounts. 3. Prepaid Insurance is increased by $1,500. Cash in Bank is decreased by $1,500.

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Prepaid Insurance for $1,500. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $1,500.

T ACCOUNTS

6.

Prepaid Insurance Debit
1,500

JOURNAL ENTRY

Cash in Bank

Credit 

7.

Credit  1,500

Debit


GENERAL JOURNAL DATE

11 12 13

PAGE

POST. REF.

DESCRIPTION

Dec. 17 Prepaid Insurance Cash in Bank Check 1001

DEBIT

21

CREDIT

1 5 0 0 00

11

1 5 0 0 00

12 13

Recording Cash Purchases of Merchandise Usually businesses purchase merchandise on account. Sometimes a business buys merchandise for cash. Let’s look at an example of a cash purchase of merchandise.

B u s i n e s s Tr a n s a c t i o n On December 19 On Your Mark purchased merchandise from FastLane Athletics for $1,300, Check 1002.

ON YOUR MARK

1002

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

FastLane Athletics

Identify Classify /

430

20 -$ 1,300.00

One thousand three hundred and no/100

DOLLARS

Security National Bank DALLAS, TEXAS

MEMO

ANALYSIS

Dec. 19

DATE PAY TO THE ORDER OF

Michael Brown


421022523
727596 1002

1. The accounts affected are Purchases and Cash in Bank. 2. Purchases is a cost of merchandise account. Cash in Bank is an asset account. 3. Purchases is increased by $1,300. Cash in Bank is decreased by $1,300.

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 430

9/12/05 3:13:45 PM

DEBIT-CREDIT RULE

4. Increases to cost of merchandise accounts are recorded as debits. Debit Purchases for $1,300. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $1,300.

T ACCOUNTS

6.

Purchases Debit
1,300

JOURNAL ENTRY

Cash in Bank Credit 

7.

Credit  1,300

Debit


GENERAL JOURNAL DATE

14 15 16

DESCRIPTION

POST. REF.

Dec. 19 Purchases Cash in Bank Check 1002

PAGE DEBIT

21

CREDIT

1 3 0 0 00

14

1 3 0 0 00

17

15 16 17

Recording Cash Payments for Items Purchased on Account An invoice received by a business is verified for items, quantities, and prices, recorded in the journal, and filed by due date in a tickler file. Each day, the invoices due for payment are removed from the tickler file. Checks are prepared, signed by an authorized person, and mailed to creditors. The amount of the check in payment of an invoice depends on the credit terms and the payment date. For example, On Your Mark purchased $2,300 of merchandise on account from Pro Runner Warehouse. The invoice, dated December 14, listed credit terms of 2/10, n/30. If On Your Mark pays for the merchandise on or before December 24, it can take a discount of $46. When it pays the invoice on December 24, On Your Mark debits Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse for the full amount of the invoice, $2,300. On Your Mark is paying for all of the merchandise and doesn’t owe any more money on this purchase. Cash in Bank is credited for $2,254, the Purchases actual amount of the check. The differCredit Debit ence between $2,300 and $2,254 is the 
cash discount, which is credited to the Decrease Side Increase Side Purchases Discounts account. Normal Balance The Purchases Discounts account tracks the cash discounts a business takes. Purchases Discounts Purchases Discounts is a contra cost of Credit Debit merchandise account. Its balance reduces
 Increase Side Decrease Side the balance of the Purchases account. Its Normal Balance normal balance is therefore a credit. Section 3 Analyzing and Recording Cash Payments

414-447_CH15_868829.indd 431

431

9/12/05 3:13:46 PM

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

1003

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

DATE

On December 24 On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

PAY TO THE ORDER OF

Dec. 24

Pro Runner Warehouse

20 -$ 2,254.00

Two thousand two hundred fifty-four and no/100

DOLLARS

Security National Bank DALLAS, TEXAS

Michael Brown

MEMO


421022523
727596 1003

ANALYSIS

Identify

Classify

/

1. The accounts affected are Accounts Payable (controlling), Accounts Payable—Pro Runner Warehouse (subsidiary), Cash in Bank, and Purchases Discounts. 2. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are liability accounts. Cash in Bank is an asset account. Purchases Discounts is a contra cost of merchandise account. 3. Accounts Payable (controlling) and Accounts Payable—Pro Runner Warehouse (subsidiary) are decreased by $2,300. Cash in Bank is decreased by $2,254. Purchases Discounts is increased by $46.

DEBIT-CREDIT RULE

4. Decreases to liability accounts are recorded as debits. Debit Accounts Payable (controlling) for $2,300. Also debit Accounts Payable—Pro Runner Warehouse (subsidiary) for $2,300. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $2,254. Increases to contra cost of merchandise accounts are recorded as credits. Credit Purchases Discounts for $46.

T ACCOUNTS

6.

Accounts Payable Debit  2,300

Cash in Bank

Credit


Accounts Payable Subsidiary Ledger Pro Runner Warehouse Debit  2,300

JOURNAL ENTRY

Purchases Discounts

Credit


7.

Credit  2,254

Debit


Credit
46

Debit 

GENERAL JOURNAL DATE

17 18 19 20

DESCRIPTION

Dec. 24 Accts. Pay./Pro Runner Ware. Cash in Bank Purchases Discounts Check 1003

POST. REF.

PAGE DEBIT

21

CREDIT

2 3 0 0 00

17

2 2 5 4 00 4 6 00

18 19 20

Other Cash Payments When a company buys merchandise from a supplier, there is often a charge for shipping the goods. The shipping terms determine whether the buyer or shipper will pay the shipping charges. 432

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 432

9/12/05 3:13:52 PM

AS YOU

Shipping terms are stated as either FOB destination or FOB shipping point. “FOB” stands for “free on board.” FOB destination means that the supplier pays the shipping cost to the buyer’s destination or location. When merchandise is shipped FOB shipping point , the buyer pays the shipping charge from the supplier’s shipping point. Terms FOB destination FOB shipping point

In Your Own Words FOB Shipping Point In your own words, explain what the term FOB shipping point means.

Shipping Cost Paid By Supplier Buyer

A shipping charge is an additional cost of the merchandise. The account set up to handle shipping charges is Transportation In, which is a cost of merchandise account. Transportation In follows the rules of debit and credit for expense accounts. Transportation In is increased by debits and decreased by credits. The normal balance of Transportation In is a debit. Here is an example of the payment of shipping charges.

B u s i n e s s Tr a n s a c t i o n

READ

Transportation In Credit  Decrease Side

Debit
Increase Side Normal Balance

ON YOUR MARK

1004

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

DATE

On December 24 On Your Mark issued Check 1004 for $275 to Dara’s Delivery Service for shipping charges on merchandise purchased from Sports Link Footwear.

PAY TO THE ORDER OF

Dec. 24

Dara’s Delivery Service

20 -$ 275.00

Two hundred seventy-five and no/100

DOLLARS

Security National Bank DALLAS, TEXAS

Michael Brown

MEMO


421022523
727596 1004

JOURNAL ENTRY

GENERAL JOURNAL DATE

21 22 23

DESCRIPTION

POST. REF.

Dec. 24 Transportation In Cash in Bank Check 1004

PAGE DEBIT

21

CREDIT

2 7 5 00

21

2 7 5 00

22 23

Recording Bankcard Fees On Your Mark makes the following entry to record the bankcard fee deducted from the business checking account. Banks charge a fee for handling bankcard sales slips. This bankcard fee is usually a percentage of the total of the amounts recorded on the bankcard sales slips processed.

B u s i n e s s Tr a n s a c t i o n On December 31 On Your Mark records the bankcard fee of $75, December bank statement. JOURNAL ENTRY

GENERAL JOURNAL DATE

24 25 26

DESCRIPTION

Dec. 31 Bankcard Fees Expense Cash in Bank December Bank Statement

POST. REF.

PAGE DEBIT

21

CREDIT

7 5 00

24

7 5 00

Section 3 Analyzing and Recording Cash Payments

414-447_CH15_868829.indd 433

25 26

433

9/12/05 3:13:53 PM

The journal entries for all of the transactions discussed and illustrated in this chapter are shown in Figure 15–7.

GENERAL JOURNAL DATE 1 2

20-Dec.

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

DESCRIPTION

PAGE POST. REF.

DEBIT

21

CREDIT 1

14 Purchases Accounts Payable/Pro Runner Warehouse Invoice 7894 15 Store Equipment Accounts Payable/Champion Store Supply Invoice 3417 16 Accounts Payable/FastLane Athletics Purchases Returns & Allowances Debit Memorandum 51 17 Prepaid Insurance Cash in Bank Check 1001 19 Purchases Cash in Bank Check 1002 24 Accounts Payable/Pro Runner Warehouse Cash in Bank Purchases Discounts Check 1003 24 Transportation In Cash in Bank Check 1004 31 Bankcard Fees Expense Cash in Bank December Bank Statement

27

2 3 0 0 00

2

2 3 0 0 00

3 4

1 2 0 0 00

5

1 2 0 0 00

6 7

2 0 0 00

8

2 0 0 00

9 10

1 5 0 0 00

11

1 5 0 0 00

12 13

1 3 0 0 00

14

1 3 0 0 00

15 16

2 3 0 0 00

17

2 2 5 4 00 4 6 00

18 19 20

2 7 5 00

21

2 7 5 00

22 23

7 5 00

24

7 5 00

25 26 27

Figure 15–7 Journal Entries for December Business Transactions

434

Chapter 15 Accounting for Purchases and Cash Payments

414-447_CH15_868829.indd 434

9/12/05 3:13:58 PM

Assessment

SECTION 3 AFTER YOU

READ

Reinforce the Main Idea Create a chart similar to the one here to analyze each cash payment transaction for a merchandising business discussed in the chapter. Identify the accounts affected, the account(s) credited, and the account(s) debited.

!CTION

!CCOUNTS!FFECTED

!CCOUNTTO#REDIT

!CCOUNTTO$EBIT

Do the Math Clara’s Designs is a crafts store with a large inventory of seasonal crafts items. As the inventory clerk, you are to create a chart or graph to compare the cost of the items purchased and the related shipping charges. Using the data provided, design a chart or graph that depicts both sets of data. What conclusions can you draw from your chart or graph? Holiday decorator ribbon Door wreaths and hangers Potpourri Styrofoam trees

Cost of Item $2,000 3,200 1,200 4,350

Shipping Charges $200 320 120 435

Problem 15–4 Recording Cash Payment Transactions Meadow Link Golf Club had the following cash payment transactions.

Instructions Record the following transactions on page 6 of the general journal in your working papers. Date

May

Transactions

1 Purchased $10,500 in golf equipment (merchandise) from TopMax Golf Manufacturers, Check 1150. 5 Issued Check 1151 for $325 to Franco’s Trucking for delivery charges on merchandise bought from TopMax Golf Manufacturers. 7 Paid Lone Star Insurance Company $2,500 for the annual premium on an insurance policy, Check 1152.

Section 3 Analyzing and Recording Cash Payments

414-447_CH15_868829.indd 435

435

9/12/05 3:14:06 PM

CH A P T ER 15

Summary

Key Concepts 1. Four documents are used in the purchasing process: • The purchase requisition is a request to order goods. • The purchase order is an offer to buy goods. • The packing list is a list of the goods shipped. • The invoice lists the credit terms; the quantity, description, unit price, and total cost of the items; the buyer’s purchase order number; and the method of shipment. 2. The four accounts used in the purchasing process and their classifications are: Purchases—cost of merchandise Purchases Discounts—contra cost of merchandise Purchases Returns and Allowances—contra cost of merchandise Transportation In—cost of merchandise 3. Cash is the lifeblood of a business and must be protected from loss, waste, theft, forgery, and embezzlement. Good internal controls include the proper management of cash payments, requiring that they be authorized, made by check, and signed by an authorized person. 4. The Purchases account is used to record the cost of merchandise purchased during the period. The rules of debit and credit for Purchases are the same as those for expense accounts. Purchases Debit
Increase Side Normal Balance

Credit  Decrease Side

Suppliers may offer cash discounts to their credit customers to encourage prompt payment. Buyers who take a cash discount record it in the Purchases Discounts account. Purchases Discounts Debit  Decrease Side

Credit
Increase Side Normal Balance

When the buyer receives credit for returned or damaged merchandise, the amount is recorded in the Purchases Returns and Allowances account. Purchases Returns and Allowances Debit  Decrease Side

Credit
Increase Side Normal Balance

The shipping charges for merchandise purchased from suppliers are considered an additional cost of merchandise. Shipping charges are debited to the Transportation In account. Transportation In Debit
Increase Side Normal Balance

436

Credit  Decrease Side

Chapter 15 Summary

414-447_CH15_868829.indd 436

9/12/05 3:14:09 PM

Summary

CHAPT E R 1 5

5. The following summarizes the accounts involved in journalizing purchases and cash payments: Purchase of merchandise on account: Debit: Purchases

Credit: Accounts Payable—Creditor’s Name

Other purchase on account (for example, store equipment): Debit: Store Equipment

Credit: Accounts Payable—Creditor’s Name

Return or allowance for merchandise purchased on account: Debit: Accounts Payable— Creditor’s Name

Credit: Purchases Returns and Allowances

Cash purchase (for example, insurance coverage): Debit: Prepaid Insurance

Credit: Cash in Bank

Cash purchase of merchandise: Debit: Purchases

Credit: Cash in Bank

Payment for merchandise purchased on account (with a cash discount taken): Debit: Accounts Payable— Creditor’s Name

Credit: Cash in Bank Purchases Discounts

Cash payment for cost of shipping merchandise: Debit: Transportation In

Credit: Cash in Bank

Bankcard Fee Debit: Bankcard Fees Expense

Credit: Cash in Bank

6. The accounts payable subsidiary ledger contains an account for each creditor. The total of the account balances in the subsidiary ledger must match the balance of the Accounts Payable controlling account in the general ledger. Figure 15–6 on page 426 summarizes how to post purchases on account to the general ledger and the accounts payable subsidiary ledger.

Key Terms accounts payable subsidiary ledger

FOB destination

(p. 433)

Purchases account

(p. 421)

FOB shipping point

(p. 433)

purchases allowance (p. 424)

bankcard fee

(p. 433)

packing slip

(p. 418)

purchases discount

(p. 418)

cost of merchandise

(p. 419)

premium

(p. 429)

purchases return

(p. 424)

debit memorandum

(p. 424)

processing stamp

(p. 418)

tickler file

(p. 422)

discount period

(p. 419)

purchase order

(p. 416)

due date

(p. 422)

purchase requisition (p. 416)

(p. 419)

Chapter 15 Summary

414-447_CH15_868829.indd 437

437

9/12/05 3:14:12 PM

C H A P T ER 15 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Processing a Purchase on Account a. List the steps in making a purchase on account. b. Why is an invoice checked against both the purchase order and the packing slip? Accounts Used in Purchasing a. What accounts are used when a business purchases merchandise on account? b. What type of account is Transportation In? Controls over Cash a. Why must each payment be supported by an approved source document? b. List four procedures that a business should use to control its cash payments. Merchandise Purchases a. Which accounts are debited and credited when merchandise is purchased for cash? b. Which accounts are debited and credited when merchandise is purchased on account? Recording Purchases and Cash Payments a. What term is used to describe the payment for insurance coverage? b. What account is debited when insurance is purchased? Accounts Payable Subsidiary Ledger a. What is the purpose of the accounts payable subsidiary ledger? b. Why do you post a purchase on account to two different ledgers?

Apply Key Terms Work with a partner to pair these terms. Discuss the relationship between the terms. Is one the result of another? Are they opposite? Once you agree, write out your explanation for each pair. accounts payable subsidiary ledger bankcard fee cost of merchandise debit memorandum discount period due date FOB destination FOB shipping point packing slip

438

premium processing stamp purchase order purchase requisition Purchases account purchases allowance purchases discount purchases return tickler file

Chapter 15 Review and Activities

414-447_CH15_868829.indd 438

9/12/05 3:14:14 PM

Computerized Accounting

CHAPT E R 1 5

Recording Purchases and Cash Payments Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Recording purchase transactions

• Prepare general journal entries and post them based on an invoice for merchandise purchased on account or for cash.

• The system automatically generates journal entries from the invoice information and posts them to the general ledger.

Recording cash payment transactions

• Write checks in payment of an invoice or memorandum. • Prepare journal entries to record the checks and post them to the general ledger. • Calculate new account balances.

• The system automatically generates journal entries as it prepares the check for payment. • The system posts journal entries and updates account balances.

Q&A Peachtree Question

Answer

How do I record the purchase of merchandise on account?

1. 2. 3. 4.

From the Tasks menu, select Purchases/Receive Inventory. Enter Vendor ID, Invoice No., and Date. Select the Apply to Purchases tab. Enter quantity, description, general ledger account, and unit price for each item.

How do I record payments on account?

1. 2. 3. 4.

From the Tasks menu, select Payments. Enter the Vendor ID, Check No., Date, and Cash account number. Click the Apply to Invoices tab. Select the invoice to be paid.

QuickBooks Q & A QuickBooks Question

Answer

How do I record the purchase of merchandise on account?

1. From the Vendors menu, select Enter Bills. 2. Enter the vendor’s name, date, purchase amount, reference number, and memo. 3. From the Items tab, select the item purchased. 4. Enter the quantity in the Qty field.

How do I record payments on account?

1. From the Vendors menu, select Pay Bills. 2. Select the Due on or before button, and enter the due date of the bills to pay. 3. Place a check mark to the left of the vendor to be paid, and set discounts or credits if applicable. 4. Select the Assign check no. radio button. 5. Enter the date of the transactions in the Payment Date field.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 15 Computerized Accounting

414-447_CH15_868829.indd 439

439

9/12/05 3:14:21 PM

Problems

C H A P T ER 15 Complete problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 15–5 1. Select the spreadsheet template for Problem 15–5. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 15–5 Determining Due Dates and Discount Amounts Sunset Surfwear frequently purchases merchandise on account. When it receives invoices, a clerk puts a processing stamp on the invoice indicating the due date, the amount of any discount, and the amount to be paid. The following invoices were received during March.

1. 2. 3. 4. 5. 6.

Invoice Number 24574 530992 211145 45679 34120 00985

Credit Terms 2/10, n/30 3/10, n/30 2/15, n/60 n/45 2/10, n/30 n/30

Invoice Amount $3,000.00 5,550.00 729.95 345.67 1,526.50 700.00

Instructions Prepare a form similar to the one that follows. The first invoice has been completed as an example. For each invoice do the following: 1. Determine the due date. Assume that Sunset Surfwear always pays invoices within the discount period. 2. Compute the discount amount, if any. 3. Compute the amount to be paid. Invoice Invoice Number Date 24574

Analyze

440

Invoice Date March 5 March 7 March 12 March 16 March 23 March 27

Mar. 5

Credit Terms

Invoice Amount

Due Date

2/10, n/30 $3,000.00 Mar. 15

Discount Amout To Amount Be Paid $60.00

$2,940.00

Compute how much money Sunset Surfwear will save by taking all discounts.

Chapter 15 Problems

414-447_CH15_868829.indd 440

9/12/05 3:14:24 PM

Problems

CHAPT E R 1 5

Problem 15–6 Analyzing Purchases and Cash Payments

SMART GUIDE

InBeat CD Shop had the following transactions in March.

Step–by–Step Instructions: Problem 15–6

Instructions Use the T accounts in your working papers. For each

1. Select the problem set for InBeat CD Shop (Prob. 15–6). 2. Rename the company and set the system date. 3. Enter all of the purchases on account transactions using the Purchases/Receive Inventory option in the Tasks menu. 4. Process all debit memorandums using the Vendor Credit Memos option in the Tasks menu. 5. Record all cash payments using the Payments option. 6. Print a Purchases Journal report, a Cash Disbursements Journal, and a Vendor Ledgers report. 7. Proof your work. 8. Print a General Ledger report to complete the Analyze activity. 9. End the session.

transaction: 1. Determine which accounts are affected. 2. Enter the debit and credit amounts in the T accounts. Date

Mar.

Transactions

2 Purchased merchandise on account from NightVision and Company, $2,000, Invoice NV-20, terms 2/10, n/30. 6 Issued Check 250 for $85 to Penn Trucking Company for delivering merchandise from NightVision and Company. 7 Purchased $300 in supplies on account from Temple Store Supply, Invoice 6011, terms n/30. 12 Issued Check 251 for $1,960 to NightVision and Company in payment of Invoice NV-20 for $2,000 less a cash discount of $40. 15 Paid Keystone Insurance Company $2,500 for the annual premium on business insurance, Check 252. 16 Purchased $3,000 in merchandise on account from NightVision and Company, Invoice NV-45, terms 2/10, n/30. 18 Issued Debit Memorandum 25 for $100 to NightVision and Company for the return of merchandise. 20 Purchased $900 in merchandise from Dandelion Records, Check 253. 22 Issued Check 254 to Temple Store Supplies for $300 for Invoice 6011.

Analyze

TIP: To save time entering transactions, group them by type and then enter the transactions in batches.

Calculate the Purchases account balance at the end of March.

Problem 15–7 Recording Purchases Transactions Shutterbug Cameras, a retail merchandising store, had the following purchases transactions in March.

Instructions In your working papers, record the transactions on page 31 of the general journal. Date

Mar.

Transactions

3 Purchased $4,500 in merchandise on account from Photo Emporium, Invoice 1221, terms 2/10, n/30. 5 Bought $750 in supplies on account from State Street Office Supply, Invoice 873, terms n/30. CONTINUE

Chapter 15 Problems

414-447_CH15_868829.indd 441

441

4/6/06 6:13:59 PM

Problems

C H A P T ER 15 Date

Mar.

Transactions (cont.)

9 10

SMART GUIDE Step–by–Step Instructions: Problem 15–7

15

1. Select the problem set for Shutterbug Cameras (Prob. 15–7). 2. Rename the company and set the system date. 3. Enter all of the purchases on account transactions using the Purchases/Receive Inventory option in the Tasks menu. 4. Process all debit memorandums using the Vendor Credit Memos option in the Tasks menu. 5. Print a Purchases Journal report and a Vendor Ledgers report. 6. Proof your work. 7. Print a general ledger report to complete the Analyze activity. 8. End the session.

20

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 15–7 1. Restore the Problem 15-7.QBB file. 2. Enter all purchases on account transactions using the Bill option from the Enter Bills window in the Vendors menu. 3. Process all debit memorandums using the Credit option from the Enter Bills window. 4. Print a Journal report, a Vendor Balance Summary, and a General Ledger report. 5. Complete the Analyze activity. 6. Back up your work.

442

25 28 29 30 31

Analyze

Returned $225 in merchandise to Photo Emporium, issued Debit Memorandum 72. Purchased $3,600 in merchandise on account from Video Optics Inc., Invoice VO94, terms 3/15, n/45. State Street Office Supply granted a $60 credit for damaged supplies purchased on August 5, Debit Memorandum 73. Bought $4,800 in store equipment from Digital Precision Equipment on account, Invoice 1288, terms n/30. Issued Debit Memorandum 74 to Video Optics Inc. for the return of $120 in merchandise. Purchased $1,800 in merchandise on account from U-Tech Products, Invoice UT66, terms n/30. Bought $270 in supplies on account from ProStudio Supply, Invoice 4574, terms n/30. Returned $150 in merchandise to U-Tech Products, Debit Memorandum 75. Issued Debit Memorandum 76 to ProStudio Supply for the return of $35 in supplies bought on March 29. Identify the total credit amount made to the Purchases Returns and Allowances account for the month.

Problem 15–8 Recording Cash Payment Transactions Cycle Tech Bicycles had the following cash payment transactions in March.

Instructions In your working papers, record the transactions on page 19 of the general journal. Date

Mar.

Transactions

1

Purchased $1,800 in merchandise from Summit Bicycles, Check 2111. 3 Issued Check 2112 for $2,450 to Spaulding Inc. in payment of the $2,500 account balance less a 2% cash discount of $50. 7 Issued Check 2113 for $3,100 to Desert Palms Insurance Company for the annual business insurance premium. 12 Paid $175 to Viking Express for delivery of merchandise purchased from Schwinn Inc., FOB shipping point, Check 2114. 17 Issued Check 2115 to Suspension Specialists for $3,880 in payment of Invoice 1492 for $4,000 less a 3% cash discount of $120. 20 Received the March bank statement and recorded bankcard fees of $275. CONTINUE

Chapter 15 Problems

414-447_CH15_868829.indd 442

4/6/06 6:14:00 PM

Problems Date

Transactions (cont.)

Mar. 24 Paid All-Star News $130 to run an advertisement promoting the store, Check 2116. 28 Bought $100 in supplies and $700 in store equipment from Superior Store Equipment Inc., Check 2117 for $800. 31 Issued Check 2118 for $2,185.50 in payment of monthly wages of $3,000 less deductions for the following taxes: Employees’ Federal Income Tax Payable, $480; Employees’ State Income Tax Payable, $105; Social Security Tax Payable, $186; and Medicare Tax Payable, $43.50.

Analyze

Determine the total decrease to the checking account for the month.

Problem 15–9 Recording Purchases and Cash Payment Transactions River’s Edge Canoe & Kayak had the following purchases and cash payment transactions for the month of March.

Instructions In your working papers, record the following transactions on page 16 of the general journal. Date

Mar.

Transactions

1 Purchased $8,200 in merchandise on account from Trailhead Canoes, Invoice TC202, terms 2/10, n/30. 5 Issued Check 887 for $98 to Santini Trucking Company for delivery of merchandise purchased from Trailhead Canoes. 7 Bought $230 in supplies on account from StoreMart Supply, Invoice SM101, terms n/30. 9 Issued Check 888 to World-Wide Insurance Company for $2,500 in payment of business insurance premium. 11 Issued Check 889 to Trailhead Canoes for $8,036 in payment of Invoice TC202 for $8,200 less a 2% cash discount of $164. 15 Purchased $6,200 in merchandise on account from Mohican Falls Kayak Wholesalers, Invoice 45332, terms 3/15, n/45. 18 Issued Debit Memorandum 67 for $25 to StoreMart Supply for damaged supplies purchased on March 7. 21 Paid StoreMart Supply the balance due on their account, $205 ($230 less $25 credit), Check 890. 25 Returned $200 in merchandise to Mohican Falls Kayak Wholesalers, Debit Memorandum 68. 28 Rollins Plumbing Service completed $120 in repair work (Maintenance Expense) on account, Invoice RP432.

Analyze

CHAPT E R 1 5

State the total debit amount to the Purchases account for the month.

SMART GUIDE Step–by–Step Instructions: Problem 15–8 1. Select the problem set for Cycle Tech (Prob. 15–8). 2. Rename the company and set the system date. 3. Record all cash payments. 4. Print a Cash Disbursements Journal and a General Journal report. 5. Complete the Analyze activity. 6. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 15–8 1. Restore the Problem 15-8.QBB file. 2. Record all cash payments. 3. Print a Journal report. 4. Complete the Analyze activity. 5. Back up your work.

SMART GUIDE Step–by–Step Instructions: Problem 15–9 1. Select the problem set for River’s Edge (Prob. 15–9). 2. Rename the company and set the system date. 3. Enter all of the purchases on account. 4. Process all debit memorandums. 5. Record all cash payments. 6. Print a Purchases Journal, Cash Disbursements Journal, and a General Ledger. 7. Proof your work. 8. Complete the Analyze activity. 9. End the session.

Chapter 15 Problems

414-447_CH15_868829.indd 443

443

4/6/06 6:14:01 PM

Problems

C H A P T ER 15 CHALLENGE PROBLEM

SOURCE DOCUMENT PROBLEM Problem 15–10 Use the source documents in your working papers to complete this problem.

SMART GUIDE Step–by–Step Instructions: Problem 15–10 1. Select the problem set for Buzz Newsstand (Prob. 15–10). 2. Rename the company and set the system date. 3. Enter all of the purchases on account. 4. Process all debit memorandums. 5. Record all cash payments. 6. Print the following reports: Purchases Journal, Cash Disbursements Journal, Vendor Ledgers, and General Ledger. 7. Proof your work. 8. Complete the Analyze activity. 9. End the session.

Buzz Newsstand’s purchases and cash payment transactions for the month of March are described below.

Instructions In your working papers: 1. Record the transactions in the general journal, page 7. 2. Post the transactions to the ledger accounts. Date

Mar.

Transactions

1 3

5 7 9 11 15 18 22 28 30

Analyze

444

Problem 15–10 Recording and Posting Purchases and Cash Payment Transactions

Purchased $5,600 in merchandise on account from ADC Publishing, Invoice 785, terms 3/15, n/45. Issued Check 1400 for $735 to Pine Forest Publications in payment of Invoice PFP98 for $750 less a 2% cash discount of $15. Issued Check 1401 for $275 to Rizzo’s Trucking Company for transportation charges. Issued Check 1402 for $588 to Delta Press in payment of Invoice DP166 for $600 less a 2% cash discount of $12. American Trend Publishers granted a $100 allowance for damaged merchandise, Debit Memorandum 33. Issued Check 1403 for $3,200 to Keystone Insurance Company for the annual premium for business insurance. Issued Check 1404 for $5,432 to ADC Publishing in payment of Invoice 785 for $5,600 less a 3% cash discount of $168. Bought $2,800 in merchandise on account from Delta Press, Invoice DP204, terms 2/10, n/30. Issued Debit Memorandum 34 to Delta Press for the return of $300 in merchandise. Paid American Trend Publishers the balance due on their account, $800, no discount, Check 1405. Bought $120 in merchandise for cash from ADC Publishing, Check 1406. Calculate how much Buzz Newsstand saved in March by taking cash discounts.

Chapter 15 Problems

414-447_CH15_868829.indd 444

9/21/05 1:30:29 PM

Winning Competitive Events

CHA PTER 15

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. If bankcard fees are automatically deducted from the checking account of a business, how will the bookkeeper journalize the fee? a. Capital account is increased by the amount of the fee. b. Cash account is increased by the amount of the fee. c. Bank Card Fees Expense is increased by the amount of the fee and Cash is decreased. d. Cash account is increased by the amount of the fee and Bank Card Fees Expense is decreased. 2. A business transaction that involves a purchase on account is considered to be a(n) a. cash transaction. b. credit transaction. c. investment of the owner. d. expense transaction. 3. A liability resulting from the purchase of goods or services on credit is usually recorded as a. an account receivable. b. an account payable. c. a revenue. d. a reduction of equity. e. a net loss.

Business Professionals of America MULTIPLE CHOICE 4. If an invoice dated September 9 and received on September 12 shows terms of 2/10 n/30, what is the last day that a discount may be taken? a. September 11 b. September 19 c. September 22 d. October 9 5. A form prepared by the customer showing the price deducted taken Need More Help? by the customer for a return is a Go to glencoeaccounting.glencoe.com and a. Purchases Discount. click on Student Center. Click on Winning b. Sales Return. Competitive Events and select Chapter 15. c. Credit Memorandum. • Practice Questions and Test-Taking Tips d. Debit Memorandum. • Concept Capsules and Terminology glencoeaccounting.glencoe.com

414-447_CH15_868829.indd 445

Chapter 15 Winning Competitive Events

445

10/13/05 10:32:31 PM

C H A P T ER 15 Critical Thinking

Processing Purchases

CASE

STUDY

Merchandising Business: Sportswear Store

ETHICS

Showing Favoritism

a mattoefr

))

$ )) Communicating ACCOUNTING

446

Real-World Applications and Connections

1. What is a purchases discount? 2. How do a purchase requisition and a purchase order differ? 3. In your job in the receiving department of a business, you are responsible for verifying the accuracy of a shipment. What do you do? 4. How are a purchases return and a purchases allowance similar? How are they different? 5. Explain the importance of using a purchase requisition, a purchase order, a packing slip, and a processing stamp in the purchasing process of a business. 6. Evaluate the usefulness of subsidiary ledgers. The Sports Loft is a retail store that sells sports clothing, accessories, and equipment. Janet Loftis wants you to design a more automated system for ordering merchandise that will free her for other management duties. INSTRUCTIONS 1. Identify issues involved in creating a new purchasing process. For example, how will it identify low stock? 2. Write a one-page report suggesting a purchasing system for The Sports Loft. Specify the information it should collect and how it would trigger new orders. Draw a diagram if necessary. Include a description of any forms needed. Manufacturers make purchases to conduct their business. Imagine that you work in the purchasing department of a large toy manufacturer like Mattel. Your job is to place orders for the parts used to make toy cars and trucks. One supplier, whose prices are only slightly higher than others, has indicated that it would send free tickets to a sports event if you order most of the parts from it. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

A Plan for Quality You were recently hired as an accounting clerk at The Writer’s Desk. One of your tasks is to process the invoices to be paid. The previous clerk did not pay invoices within the discount period and often paid them late. Write out a plan to improve and maintain quality regarding accounts payable. Address how you will use a ticker file to implement the plan.

Chapter 15 Real-World Applications and Connections

414-447_CH15_868829.indd 446

9/12/05 3:14:35 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 1 5

Monitoring and Correcting Performance of Systems Identifying trends, predicting changes, finding problems, and applying solutions are skills of a systems thinker. ON THE JOB Your town is hosting a big mountain bike competition. As an Action Athletics employee, you know the event offers a chance to increase cycling gear sales. You recommend adjusting and upgrading the cycling merchandise line for this event. INSTRUCTIONS 1. Pair up with a student and role-play your “sales pitch” to persuade your employer to add to the current merchandise line. 2. Using a spreadsheet program, list 10 biking accessories to include in inventory. Make reasonable estimates for each item’s price and its sales for the month of the bike event when about 200 cyclists will visit the store.

Utilizing E-Procurement When Schlumberger Oilfield Services needed supplies for its global operations, it used an e-procurement system to connect buyers and suppliers via the Internet. Bidders around the world can compete online for contracts in different currencies and languages. The easy-to-use system saves Schlumberger nearly $400,000 a month in transaction costs and has decreased its order fulfillment time. INSTRUCTIONS Imagine that your company has manufacturing plants in both the United States and Japan. Describe how an e-procurement system might be helpful.

Applying for a Loan You may soon apply for a loan from a financial institution to pay for your education or to buy a vehicle. When you borrow money, you must understand the loan’s finance charges and what the application process involves. PERSONAL FINANCE ACTIVITY Assume that you plan to borrow $6,000 from your bank to purchase a five-year-old automobile. What questions do you expect the bank to ask you? What questions will you ask? PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 15.

Identifying Corporate Goals The information in an annual report is directed to many audiences: existing and potential stockholders; financial analysts and advisors; government regulators, such as the Securities and Exchange Commission (SEC); employees; and creditors. INSTRUCTIONS Use the Dear Fellow Stockholders letter in PETsMART’s annual report in Appendix F at the back of your textbook to complete the following. 1. List three of PETsMART’s goals for 2004 and beyond that are measurable. 2. Name PETsMART’s most powerful asset, and explain how PETsMART is investing in this asset.

Chapter 15 Real-World Applications and Connections

414-447_CH15_868829.indd 447

447

9/16/05 3:43:15 PM

CH A P T ER 16

Special Journals: Sales and Cash Receipts BEFORE YOU

READ

What You’ll Learn

Predict

1.

Identify the special journals and explain how they are used in a merchandising business.

1. 2. 3. 4.

2.

Record transactions in sales and cash receipts journals.

3.

Post from the sales and cash receipts journals to customer accounts in the accounts receivable subsidiary ledger.

4.

5.

6. 7.

Foot, prove, total, and rule the sales and cash receipts journals.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING SALES GROWTH

The Sharper Image The Sharper Image has everything you never thought you needed. How about a robotic massage chair? A heat sensitive

Post column totals from the sales and cash receipts journals to general ledger accounts.

foam pillow? Wireless outdoor speakers? The Sharper Image is

Prepare a schedule of accounts receivable.

a monthly catalog. The Sharper Image also sells close-out

Define the accounting terms introduced in this chapter.

known for its selection of innovative and fun lifestyle products. Founded in 1977, the company sells products in more than 175 stores, through its primary Web site, and through inventory through an online auction Web site. Companies like The Sharper Image often track and try to identify customer shopping trends. For example, over a one

▲

Why It’s Important

year period, the company reported an increase of 22 percent in

Using special journals instead of the general journal can save time and reduce errors.

20 percent. Meanwhile, in-store sales for the same time frame

its Internet sales. Catalog sales in that period were also up by decreased by 1 percent.

What Do You Think? How do you think data on customer shopping habits might be used to improve overall financial performance?

448

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 448

4/17/06 7:03:57 AM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE In earlier chapters you learned about the cycle of buying and selling merchandise. Dollars from sales are used to buy merchandise, which is in turn sold to customers. Some sales dollars come from customers who pay cash, while others come from sales on credit. Both types are recorded in the accounting records. In this chapter you will see how special journals simplify the process of recording sales.

glencoeaccounting.glencoe.com

448-479_CH16_868829.indd 449

Personal Connection 1. In your job, do you handle cash and personal checks? Do you handle credit card sales? 2. If a business did not accept credit cards, how do you think this would affect overall sales?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 16.

449

4/17/06 7:04:01 AM

SECTION 1

BEFORE YOU

READ

Main Idea The sales journal is used to record credit sales of merchandise.

Read to Learn… ➤ the purpose of special

journals. (p. 450) ➤ how to use the sales journal. (p. 450)

Key Terms special journals sales journal footing

The Sales Journal You have learned how to record a variety of business transactions in a general journal. A merchandising business can record all of its transactions in a general journal. However, each transaction requires at least three journal lines—one line for the debit, one line for the credit, and one line for the explanation. Each debit and credit is posted separately to the general ledger. For merchandising businesses with many sales transactions, such as Crate & Barrel, this would be very time consuming. To improve efficiency many merchandising businesses use special journals. In this chapter and the next chapter, you will learn how to record transactions in special journals.

Using Special Journals Why Are Special Journals Used? Special journals have amount columns that are used to record debits and credits to specific general ledger accounts. Most transactions are recorded on one line. Special journals thus simplify the journalizing and posting process. The four most commonly used special journals and the type of transaction recorded in each journal are: Journal Sales journal Cash receipts journal Purchases journal Cash payments journal

Transaction sale of merchandise on account receipt of cash purchase of any asset on account payment of cash, including payment by check

Businesses that use special journals still need the general journal to record transactions that cannot be entered in the special journals. Let’s first look at the sales journal.

Journalizing and Posting to the Sales Journal How Do You Use the Sales Journal? The sales journal is a special journal used to record sales of merchandise on account. Figure 16–1 shows a page from the sales journal used by On Your Mark Athletic Wear. Like the general journal, the sales journal has a space for the page number and columns for the date and the posting reference. There is a separate column in which to record the sales slip number and a column

450

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 450

4/17/06 7:04:10 AM

SALES JOURNAL DATE

SALES SLIP NO.

CUSTOMER’S ACCOUNT DEBITED

PAGE POST. REF.

SALES TAX PAYABLE CREDIT

SALES CREDIT

ACCOUNTS RECEIVABLE DEBIT

1

1

2

2

3

3

Record the amount of the merchandise sold on account Record the amount of sales tax on the sale Record the total amount to be received from the customer on account

Figure 16–1 Sales Journal

in which to record the name of the charge customer. There are also three special amount columns. Figure 16–1 illustrates what is to be recorded in each column.

ON YOUR MARK

Recording Sales of Merchandise on Account

ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207

Are you ready to record a sale on account in the sales journal? It’s simple. Let’s look at the same transactions you analyzed in Chapter 14 for On Your Mark Athletic Wear. This time we will record transactions using the sales journal.

DATE: December 1, 20--

NO. 50

Casey Klein 3345 Spring Creek Parkway Plano, Texas 75094

SOLD TO CLERK

CASH

CHARGE

QTY.

DESCRIPTION

n/30

UNIT PRICE

AMOUNT

$ 100.00

$ 100 00

6 Pair Athletic Socks

10.00

60 00

1 Vinyl Jacket/Pants

40.00

40 00

SUBTOTAL

$ 200 00

SALES TAX

12 00 $ 212 00

1 Pair Running Shoes

B u s i n e s s Tr a n s a c t i o n

TERMS

✓

B.E.

On December 1 On Your Mark sold merchandise on account to Casey Klein for $200 plus $12 sales tax, Sales Slip 50.

 

TOTAL

JOURNAL ENTRY SALES JOURNAL SALES SLIP CUSTOMER’S ACCOUNT DEBITED POST. REF. NO.

DATE

2

20-Dec.

3

1

1

12

PAGE

SALES CREDIT

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE DEBIT 1

1

50 Casey Klein

2

2 0 0 00

3

4

1 2 00

5

2 1 2 00

6

2 3

To record the transaction in the sales journal, journalize from left to right by following these steps. 1. Enter the date of the sales slip in the Date column. 2. Enter the sales slip number in the Sales Slip No. column. 3. Enter the name of the customer in the Customer’s Account Debited column. 4. Enter the total of the merchandise sold in the Sales Credit column. (This is the amount shown in the subtotal box of the sales slip.) 5. Enter the amount of the sales tax in the Sales Tax Payable Credit column. 6. Enter the total amount to be received from the customer in the Accounts Receivable Debit column. (This is the amount shown in the total box of the sales slip.) Section 1 The Sales Journal

448-479_CH16_868829.indd 451

451

4/17/06 7:04:12 AM

You learned in Chapter 14 that businesses do not impose sales tax on the sale of merchandise to tax-exempt organizations. The next business transaction involves a sale that On Your Mark makes to an organization that has tax-exempt status. This transaction is analyzed in the same manner as the previous transac-

ON YOUR MARK ATHLETIC WEAR 595 Leslie Street, Dallas, TX 75207

DATE: December 3, 20--

NO. 51

South Branch High School Athletics 1750 Rutgers Dr. Dallas, TX 75207

SOLD TO CLERK

CASH

CHARGE

TERMS

✓

2/10, n/30

B.E. QTY.

B u s i n e s s Tr a n s a c t i o n

UNIT PRICE

DESCRIPTION

AMOUNT

$ 40.00 $

600 00

Baseball Caps

20.00

300 00

15

Baseball Uniforms

15 15

Baseball Mitts

35.00

525 00

2

Baseballs

15.00

30 00

3

Baseball Bats

15.00

45 00

SUBTOTAL $ 1,500 00

On December 3 On Your Mark sold merchandise on account to South Branch High School Athletics for $1,500, Sales Slip 51.

 

SALES TAX TOTAL

0 00 $ 1,500 00

JOURNAL ENTRY SALES JOURNAL SALES SLIP CUSTOMER’S ACCOUNT DEBITED POST. REF. NO.

DATE

3

3 4

1

51 South Branch H.S. Ath.

2

3

12

PAGE

SALES CREDIT

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE DEBIT

1 5 0 0 00

1 5 0 0 00

3

4

5

4

tion—except there is no sales tax. Journalizing this transaction involves only five steps. The first four steps are the same. There is no sales tax so the fifth step is to enter the total amount to be received from the customer in the Accounts Receivable Debit column. For sales that do not include a sales tax, amounts entered in the Sales Credit column and in the Accounts Receivable Debit column are the same.

AS YOU

READ

Key Point Sales Journal Entry For each line of the sales journal, make sure that the credits (Sales and Sales Tax Payable) equal the debit (Accounts Receivable).

452

Posting a Sales Journal Entry to the Accounts Receivable Subsidiary Ledger In Chapter 14 you learned about posting to the accounts receivable subsidiary ledger. To keep the balances of the customer accounts current, sales journal transactions are posted daily to the accounts receivable subsidiary ledger. Whether you use the general journal or the sales journal when posting to the accounts receivable subsidiary ledger, the process is similar. Refer to Figure 16–2 and follow these steps. 1. Enter the date of the transaction in the Date column of the subsidiary ledger account. Use the same date as the journal entry. 2. In the Posting Reference column of the subsidiary ledger account, enter the journal letter and the journal page number. Use the letter S for the sales journal. 3. In the Debit column of the subsidiary ledger account, enter the total amount to be received from the customer. 4. Compute the new balance and enter it in the Balance column. To find the new balance, add the amount in the Debit column to the previous balance amount.

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 452

4/17/06 7:04:15 AM

SALES JOURNAL SALES SLIP NO.

DATE 1 2

20-Dec.

PAGE POST. REF.

CUSTOMER’S ACCOUNT DEBITED

SALES TAX PAYABLE CREDIT

SALES CREDIT

12

ACCOUNTS RECEIVABLE DEBIT 1

1

✓

50 Casey Klein

2 0 0 00

1 2 00

2 1 2 00

5

3

1

3

3

Casey Klein ADDRESS 3345 Spring Creek Parkway, Plano, TX 75094 NAME

DATE

20-Dec.

POST. REF.

DESCRIPTION

✓ S12

1 Balance 1

2

2 DEBIT

CREDIT

BALANCE

5 0 0 00 7 1 2 00 4

2 1 2 00

5. Return to the sales journal and enter a check mark (✓) in the Posting Reference column. The check mark indicates that the transaction has been posted to the accounts receivable subsidiary ledger. In manual accounting systems, customer accounts are not numbered, so a check mark is used in the Posting Reference column.

Figure 16–2 Posting a Sales Journal Entry to the Accounts Receivable Subsidiary Ledger

Completing the Sales Journal All special journals have amount columns used to record debits and credits to specific general ledger accounts. These amount columns simplify posting. Instead of posting each transaction separately to the general ledger, only the amount column totals are posted. For the sales journal, the column totals posted are the Sales Credit, the Sales Tax Payable Credit, and the Accounts Receivable Debit. Therefore, only three postings are made to the general ledger from the sales journal.

Footing, Proving, Totaling, and Ruling the Sales Journal Before posting amounts to the general ledger, calculate and verify the column totals. Refer to Figure 16–3 on page 454 for each step. 1. Draw a single rule across the three amount columns, just below the last transaction. 2. Foot the amount columns. A footing is a column total written in small penciled figures. A footing must be verified. It is written in pencil so that it can be erased if a mistake is discovered. 3. On a separate sheet of paper, test for the equality of debits and credits. The total of the debit column should equal the total of the two credit columns.

Debit Column Accounts Receivable $11,305 Total

$11,305

AS YOU

READ

Key Point Erasing a Footing A footing can be erased to correct an error because it is not a formal entry in the accounting records. It is an interim step that is done to prove the journal.

Credit Columns Sales Tax Payable $ 555 Sales 10,750 Total $11,305 Section 1 The Sales Journal

448-479_CH16_868829.indd 453

453

4/17/06 7:04:15 AM

SALES JOURNAL SALES SLIP NO.

DATE 1 2

20-Dec.

3 4 5 6 7 8 9 10 11 12 13 14

CUSTOMER’S ACCOUNT DEBITED

PAGE

POST. REF.

SALES CREDIT

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

200 500 500 300 100 250 400 500 000 350 200 450

SALES TAX PAYABLE CREDIT

12

ACCOUNTS RECEIVABLE DEBIT 1

1 3 5 9 10 12 18 20 24 26 28 30 31

50 51 52 53 54 55 56 57 58 59 60 61

Casey Klein South Branch High School Athletics Break Point Sports Club Gabriel Ramos Kim Wong Robert Galvin Joe Dimaio Megan Sullivan Tammy’s Fitness Club Anita Montero Shashi Rahim Lara Young Totals

1 3

1

2

00 00 00 00 00 00 00 00 00 00 00 00

10 7 5 0 00

10 7 5 0 00

1 2 00 210 18 6 15 24 30 60 21 12 147

00 00 00 00 00 00 00 00 00 00

5 5 5 00

5 5 5 00

1 3

1

2

212 500 710 318 106 265 424 530 060 371 212 597

00 00 00 00 00 00 00 00 00 00 00 00

11 3 0 5 00

11 3 0 5 00

15

2 3 4 5 6 7 8 9 10 11

13

5

Figure 16–3 Totaled and Ruled Sales Journal

3

2

14 15

4

1

12

6 7

4. In the Date column, on the line below the single rule, enter the date the journal is being totaled. 5. On the same line, in the Customer’s Account Debited column, enter the word Totals. 6. Enter the column totals, in ink, just below the footings. 7. Double-rule the three amount columns. A double rule, as you know, indicates that the totals have been verified. After the sales journal has been footed, proved, totaled, and ruled, the column totals are posted to the general ledger.

AS YOU

READ

Key Point Posting from a Special Journal Post information from left to right across the ledger form. By following this procedure, you will post all information from the journal entry.

454

Posting the Total of the Sales Credit Column Refer to Figure 16–4 as you read the procedure for posting the total of the Sales Credit column to the Sales account in the general ledger. 1. In the Date column of the Sales account in the general ledger, enter the date from the Totals line of the sales journal. 2. Enter the sales journal letter and page number in the Posting Reference column. Remember that S is the letter for the sales journal. 3. In the Credit column, enter the total from the Sales Credit column of the sales journal. 4. Compute the new balance and enter it in the Credit Balance column. To determine the new balance, add the amount entered in the Credit column to the previous balance. 5. Return to the sales journal and enter the Sales account number, in parentheses, below the double rule in the Sales Credit column. The number written in parentheses indicates that the column total has been posted to the general ledger account.

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 454

4/17/06 7:04:16 AM

SALES JOURNAL SALES SLIP NO.

DATE 1 2

20-Dec.

PAGE POST. REF.

CUSTOMER’S ACCOUNT DEBITED

SALES TAX PAYABLE CREDIT

SALES CREDIT

ACCOUNTS RECEIVABLE DEBIT 1

13 14

1

50 Casey Klein

✓

30 31

61 Lara Young Totals

✓

2 0 0 00

1 2 00

2 4 5 0 00 10 7 5 0 00

15

10 7 5 0 00 (401)

16

5 1

12

DATE

20-Dec.

DESCRIPTION

POST. REF.

1 4 7 00

2 5 9 7 00

13

5 5 5 00

11 3 0 5 00

11 3 0 5 00

14 15 16

2

ACCOUNT NO. 401 BALANCE

DEBIT

✓ S12

1 Balance 31

2

5 5 5 00

3

ACCOUNT Sales

2 1 2 00

CREDIT

DEBIT

CREDIT

300 0 0 0 00 310 7 5 0 00 4

10 7 5 0 00

Posting the Total of the Sales Tax Payable Credit Column

Figure 16–4 Posting the Sales Credit Total to the General Ledger Account

The next amount to be posted is the Sales Tax Payable Credit column total. Refer to Figure 16–5 as you read the following procedure. 1. In the Date column of the Sales Tax Payable account, enter the date from the Totals line of the sales journal. 2. Enter the sales journal letter and page number in the Posting Reference column. 3. In the Credit column, enter the total from the Sales Tax Payable Credit column of the sales journal.

Figure 16–5 Posting the Sales Tax Payable Credit Total to the General Ledger

SALES JOURNAL SALES SLIP NO.

DATE 1 2

20-Dec.

13 14

PAGE POST. REF.

CUSTOMER’S ACCOUNT DEBITED

SALES TAX PAYABLE CREDIT

SALES CREDIT

12

ACCOUNTS RECEIVABLE DEBIT 1

1

50 Casey Klein

✓

31 31

61 Lara Young Totals

✓

2 0 0 00 2 4 5 0 00 10 7 5 0 00

10 7 5 0 00 ( 4 0 1)

15

2 1 2 00

2

2 5 9 7 00

13

1 2 00 1 4 7 00 5 5 5 00

5 5 5 00 ( 2 2 0)

11 3 0 5 00

11 3 0 5 00

14 15

16

16

1

3

ACCOUNT Sales Tax Payable DATE

20-Dec.

DESCRIPTION

1 Balance 4 31

POST. REF.

✓ G20 S12

5 ACCOUNT NO. 220 BALANCE

DEBIT

CREDIT

9 00 5 5 5 00

DEBIT

CREDIT

1 3 0 0 00 1 2 9 1 00 1 8 4 6 00 4

Section 1 The Sales Journal

448-479_CH16_868829.indd 455

2

455

4/17/06 7:04:16 AM

AS YOU

4. Compute the new balance and enter it in the Credit Balance column. 5. Return to the sales journal and enter the Sales Tax Payable account number, in parentheses, below the double rule in the Sales Tax Payable Credit column.

READ

Key Point Posting a Special Journal Column Total Entering an account number in parentheses under a column total means that the column total has been posted to the general ledger.

Posting the Total of the Accounts Receivable Debit Column The last column of the sales journal to be posted is the Accounts Receivable Debit column. Refer to Figure 16–6 as you read these steps. 1. In the Date column of the Accounts Receivable account, enter the date from the Totals line of the sales journal. 2. Enter the sales journal letter and page number in the Posting Reference column. 3. In the Debit column, enter the total from the Accounts Receivable Debit column of the sales journal. 4. Compute the new balance and enter it in the Debit Balance column. 5. Return to the sales journal and enter the Accounts Receivable account number, in parentheses, below the double rule in the Accounts Receivable Debit column. SALES JOURNAL

SALES SLIP NO.

DATE 1 2

20-Dec.

13 14

PAGE POST. REF.

CUSTOMER’S ACCOUNT DEBITED

SALES TAX PAYABLE CREDIT

SALES CREDIT

12

ACCOUNTS RECEIVABLE DEBIT 1

1

50 Casey Klein

✓

30 31

61 Lara Young Totals

✓

2 0 0 00 2 4 5 0 00 10 7 5 0 00

10 7 5 0 00 ( 4 0 1)

15

2 1 2 00

2

2 5 9 7 00

13

1 2 00 1 4 7 00 5 5 5 00

5 5 5 00 ( 2 2 0)

11 3 0 5 00

11 3 0 5 00 ( 1 1 5)

16

14 15 16

1

5 ACCOUNT Accounts Receivable DATE

20-Dec.

DESCRIPTION

1 Balance 4 31

2

ACCOUNT NO. 115 POST. REF.

✓ G20 S12

DEBIT

CREDIT

3

1 5 9 00 11 3 0 5 00

BALANCE DEBIT

6 2 5 9 00 6 1 0 0 00 17 4 0 5 00

CREDIT

4

Figure 16–6 Posting Accounts Receivable Debit Total to the General Ledger

456

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 456

4/17/06 7:04:16 AM

SALES JOURNAL SALES SLIP NO.

DATE

16

Jan.

2 23 24 24

32 33 34

CUSTOMER’S ACCOUNT DEBITED

POST. REF.

62 Casey Klein 79 Kim Wong 80 Robert Galvin Carried Forward

12

PAGE

✓

SALES TAX PAYABLE CREDIT

SALES CREDIT

ACCOUNTS RECEIVABLE DEBIT

6 0 0 00

3 6 00

6 3 6 00

16

9 0 0 00 1 1 0 0 00

5 4 00 6 6 00

9 5 4 00 1 1 6 6 00

32

12 5 0 0 00

6 9 0 00

13 1 9 0 00

12 5 0 0 00

6 9 0 00

13 1 9 0 00

35

SALES JOURNAL SALES SLIP NO.

DATE

2

20-Jan.

CUSTOMER’S ACCOUNT DEBITED

5

10

4

3

1

34 35

2

1

33

PAGE SALES TAX PAYABLE CREDIT

POST. REF.

SALES CREDIT

✓

12 5 0 0 00

6

13

ACCOUNTS RECEIVABLE DEBIT 1

24

✓

Brought Forward

6 9 0 00

13 1 9 0 00

3

2 3

7

8

9 Figure 16–7 Starting a New Journal Page

Proving the Sales Journal at the End of a Page All special journals are totaled and proved at the end of every month. Sometimes, however, a business has so many transactions in one month that it is impossible to fit them all on one journal page. When this occurs, the journal page is totaled and ruled before a new page is started. Refer to Figure 16–7 and follow these steps to record the totals and carry them forward to the next page. 1. Draw a single rule across the three amount columns below the last transaction. Foot the columns and prove the equality of debits and credits. 2. On the line following the last transaction, enter the date of the last transaction in the Date column. 3. In the Customer’s Account Debited column, write Carried Forward. 4. Place a check mark (✓) in the Posting Reference column. This check mark indicates that these totals are not to be posted. 5. Enter the column totals in ink. Do not place a double rule under the columns. 6. On the next journal page, enter the new page number. 7. On lines 1 and 2, enter the complete date (year, month, and day) in the Date column. Use the same date as on the last line of the previous page. 8. Place a check mark (✓) in the Sales Slip No. column and write Brought Forward in the Customer’s Account Debited column. 9. Place a check mark (✓) in the Posting Reference column. 10. Enter the column totals from the previous page on line 2.

AS YOU

READ

In Your Experience Proving Accuracy How have you proved the accuracy of your personal financial documents?

The journal page is now ready for the recording of the next transaction.

Section 1 The Sales Journal

448-479_CH16_868829.indd 457

457

4/17/06 7:04:17 AM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table similar to this one to identify the four special journals and the kind of transaction recorded in each.

3PECIAL*OURNAL

+INDOF4RANSACTION

Do the Math Vijay Products had the following amounts entered in the Sales Credit Column of its October Sales Journal. Oct. 2 $1,500 10 3,400 17 8,200 30 7,600 Assume a 3% sales tax was imposed on each sale. Answer the following questions. 1. What amount should be entered in the Sales Tax Payable Credit Column for each sale? 2. What amount should be entered in the Accounts Receivable Debit Column for each sale?

Problem 16–1 Posting Column Totals from the Sales Journal Instructions Here are the column totals of the sales journal for the month of April. In your working papers, post these totals to the appropriate general ledger accounts.

SALES JOURNAL SALES SLIP CUSTOMER’S ACCOUNT DEBITED POST. REF. NO.

DATE 1 2

32

20-Apr.

SALES CREDIT

ACCOUNTS RECEIVABLE DEBIT 1

1 30

47 Amy Anderson

✓

Totals

8 0 0 00

4 8 00

12 0 0 0 00

8 4 8 00

2

7 2 0 00 12 7 2 0 00

32

33

Problem 16–2 Analyzing a Source Document Metro Sports Distributors had this transaction that occurred on June 15.

Instructions 1. Analyze the sales slip shown. In your working papers, record the required entry on page 3 of the sales journal. 2. Post to the customer’s account in the accounts receivable subsidiary ledger.

33

METR       DATE:

June 15, 20--

NO.

SOLD TO CLERK

CASH

CHARGE

TERMS

✓

3/15, n/45

RDP QTY.

113

M&M Consultants 2816 Mt. Odin Drive Williamsburg, VA 23185

UNIT PRICE

DESCRIPTION

10 Golf Bags 2 doz. Ladies Golf Shirts 20 Golf Caps

 

458

4

PAGE SALES TAX PAYABLE CREDIT

$

AMOUNT

50.00 $ 500 00 100.00/doz

200 00

6.00

120 00

SUBTOTAL

$ 820 00

SALES TAX TOTAL

41 00 $ 861 00

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 458

4/17/06 7:04:17 AM

The Cash Receipts Journal

SECTION 2

In Chapter 14 you learned that the three most common sources of cash for a merchandising business are payments from charge customers, cash sales, and bankcard sales. These businesses also receive cash, but less frequently, from the sale of other business assets. Can you imagine how many checks local cable television, electric, and telephone companies receive daily? They must have a streamlined cash receipts process to record checks efficiently. In this section you will learn to use a cash receipts journal as an efficient way to record cash receipts.

Journalizing and Posting to the Cash Receipts Journal

BEFORE YOU

Main Idea The cash receipts journal is used to record the cash a business receives.

Read to Learn… ➤ how to use the cash

How Do You Use the Cash Receipts Journal? The cash receipts journal is a special journal used to record all cash receipt transactions. It always has a Cash in Bank Debit column since every transaction in it debits the Cash in Bank account. The number of credit columns varies, depending on the company’s needs. On Your Mark’s cash receipts journal in Figure 16–8 has six amount columns plus the date, source document, account name, and posting reference columns. To keep the customer account balances current, the entries in the Accounts Receivable Credit column are posted daily to the accounts

receipts journal. (p. 459) ➤ the purpose of the schedule of accounts receivable. (p. 466) ➤ about Internet sales. (p. 468)

Key Terms cash receipts journal schedule of accounts receivable

CASH RECEIPTS JOURNAL DATE

DOC. NO.

ACCOUNT NAME

POST. REF.

GENERAL CREDIT

SALES CREDIT

READ

PAGE

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

13

CASH IN BANK DEBIT

1

1

2

2

3

3

• Record credits to accounts for which there is no special column • Record amount of merchandise purchased by customers using cash or bankcards • Record amount of sales tax collected on cash or bankcard sales • Record payments from charge customers here • Record the amount of cash discounts taken by charge customers • Record the amount of cash actually received in the transaction

Figure 16–8 Cash Receipts Journal

Section 2 The Cash Receipts Journal

448-479_CH16_868829.indd 459

459

4/17/06 7:04:19 AM

receivable subsidiary ledger. The entries in the General Credit column are also posted daily to the individual general ledger accounts. At month-end all special amount column totals are posted to the general ledger accounts named in the column headings.

AS YOU

Recording Cash from Charge Customers

READ

Follow these steps when journalizing cash receipts from charge customers. The source document for this transaction is the receipt.

Key Point

1. Enter the date of the transaction in the Date column. 2. Enter the receipt number in the Document Number column. Write the letter R (for receipt) before the receipt number. 3. Enter the name of the customer in the Account Name column. 4. Enter the decrease in the amount owed by the customer in the Accounts Receivable Credit column. 5. Enter the amount of cash received in the Cash in Bank Debit column.

Cash Receipts Journal Entry Be sure that the debit and credit entries on each line of the cash receipts journal are equal.

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 301

595 Leslie Street, Dallas, TX 75207

On December 5 On Your Mark received $212 from Casey Klein to apply on account, Receipt 301.

Dec. 5 RECEIVED FROM Casey Klein

20 --

$ 212.00

Two hundred twelve and no/100

DOLLARS

FOR On account

JOURNAL ENTRY

RECEIVED BY

Michael Smith

CASH RECEIPTS JOURNAL DATE 1 2 3

DOC. NO.

ACCOUNT NAME

GENERAL CREDIT

SALES CREDIT

20-Dec. 5 R301 Casey Klein

1

AS YOU

2

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

CASH IN BANK DEBIT 1

2 1 2 00

3

4

2 1 2 00

5

2 3

When this entry has been posted to the customer’s account in the accounts receivable subsidiary ledger, enter a check mark (✓) in the Posting Reference column of the cash receipts journal.

READ

Key Point Journalizing Cash Receipts When journalizing a cash receipt transaction involving a sales discount, be sure to credit Accounts Receivable for the amount of the original sales transaction less any related sales returns or allowances.

460

POST. REF.

13

PAGE

Recording Cash Received on Account, Less a Cash Discount Let’s use these steps to record a cash receipt transaction with a cash discount. 1. Enter the date of the receipt in the Date column. 2. Enter the receipt number in the Document Number column. Remember to write the letter R before the receipt number. 3. Enter the name of the customer in the Account Name column. 4. In the Accounts Receivable Credit column, enter the amount of the original sales transaction (the amount that was debited in the sales journal) less any related sales returns or allowances. 5. Enter the cash discount amount in the Sales Discounts Debit column. 6. Enter the amount of cash received in the Cash in Bank Debit column.

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 460

4/17/06 7:04:20 AM

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 302

595 Leslie Street, Dallas, TX 75207

On December 12 On Your Mark received $1,470 from South Branch High School Athletics in payment of Sales Slip 51 for $1,500 less the discount of $30, Receipt 302.

Dec. 12

20 --

RECEIVED FROM South Branch H.S. Athletics $ 1,470.00

One thousand four hundred seventy and no/100

DOLLARS

FOR On account RECEIVED BY

Michael Smith

JOURNAL ENTRY CASH RECEIPTS JOURNAL DATE

DOC. NO.

ACCOUNT NAME

POST. REF.

GENERAL CREDIT

SALES CREDIT

SALES TAX PAYABLE CREDIT

1

4

2

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

1 5 0 0 00

12 R302 South Branch H.S. Ath.

3

13

PAGE

3

3 0 00

4

CASH IN BANK DEBIT

1 4 7 0 00

3

6

4

5

Recording Cash Sales On Your Mark records cash sales every two weeks, but many businesses journalize cash sales and deposit cash daily. Follow these steps to enter cash sales in the cash receipts journal. The source document is the cash register tape. 1. Enter the date written on the cash register tape in the Date column. 2. Enter the number of the tape in the Document Number column. Write the letter T (for tape) before the tape number. 3. Enter the words Cash Sales in the Account Name column. 4. Enter a dash in the Posting Reference column to indicate that no entry has been posted individually to the general ledger accounts. Cash sales amounts are posted to the general ledger as part of the column totals at month-end. 5. Enter the amount of merchandise sold in the Sales Credit column. 6. Enter the amount of the sales taxes collected in the Sales Tax Payable Credit column. 7. Enter the total cash received in the Cash in Bank Debit column.

Dec. 15 Tape 55

B u s i n e s s Tr a n s a c t i o n On December 15 On Your Mark records the cash sales for the first two weeks of December, $3,000, and $180 in related sales taxes, Tape 55.

3000.00 CA 180.00 ST

JOURNAL ENTRY CASH RECEIPTS JOURNAL DATE

ACCOUNT NAME

15 T55 Cash Sales

4 5

DOC. NO.

1

2

3

POST. REF.

GENERAL CREDIT

SALES CREDIT

—

3 0 0 0 00

4

5

13

PAGE

SALES TAX PAYABLE CREDIT

1 8 0 00

6

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

CASH IN BANK DEBIT

3 1 8 0 00

4

7

5

Section 2 The Cash Receipts Journal

448-479_CH16_868829.indd 461

461

4/17/06 7:04:21 AM

AS YOU

Recording Bankcard Sales

READ

A business can record and deposit bankcard sales slips at any interval. On Your Mark processes them every two weeks. Follow these steps to enter bankcard sales in the cash receipts journal. Note the similarity to recording a cash sale. The entry’s source document is the cash register tape.

Instant Recall Normal Credit Balances Sales Sales Tax Payable

1. Enter the date of the cash register tape in the Date column. 2. Enter the number of the tape in the Document Number column. Remember to write the letter T before the tape number. 3. Enter the words Bankcard Sales in the Account Name column. 4. Enter a dash in the Posting Reference column. The amounts recorded in the bankcard sales entry will be posted to the general ledger as part of the column totals at the end of the month. 5. Enter the amount of merchandise sold in the Sales Credit column. 6. Enter the sales taxes collected in the Sales Tax Payable Credit column. 7. Enter the total cash received in the Cash in Bank Debit column.

Dec. 15 Tape 55

B u s i n e s s Tr a n s a c t i o n On December 15 On Your Mark recorded bankcard sales of $700 for the first two weeks of December and related sales taxes of $42, Tape 55.

700.00 BCS 42.00 ST

JOURNAL ENTRY CASH RECEIPTS JOURNAL DATE

ACCOUNT NAME

15 T55 Bankcard Sales

5 6

DOC. NO.

1

2

3

POST. REF.

—

4

GENERAL CREDIT

SALES CREDIT

7 0 0 00

5

13

PAGE

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

4 2 00

6

SALES DISCOUNTS DEBIT

CASH IN BANK DEBIT

7 4 2 00

7

5 6

Recording Other Cash Receipts Occasionally, a retail business receives cash from a transaction that does not involve the sale of merchandise. Since the business is receiving cash, it enters the transaction in the cash receipts journal. These are the steps to enter the next business transaction in the cash receipts journal:

AS YOU

READ

Instant Recall Normal Debit Balances Accounts Receivable Sales Discounts Cash in Bank

462

1. Enter the date of the receipt in the Date column. 2. Enter an R and the receipt number in the Document Number column. 3. Enter Office Equipment in the Account Name column. 4. Enter the amount of the credit in the General Credit column. Use the General Credit column when the credit part of the entry is to an account that does not have a special amount column. 5. Enter the amount of cash received in the Cash in Bank Debit column.

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 462

4/17/06 7:04:21 AM

B u s i n e s s Tr a n s a c t i o n On December 16 On Your Mark received $30 from Mandy Harris, an office employee. She purchased a calculator that the business was no longer using, Receipt 303.

ON YOUR MARK

RECEIPT

ATHLETIC WEAR

No. 303

595 Leslie Street, Dallas, TX 75207

Dec. 16 RECEIVED FROM Mandy Harris

20 --

$ 30.00

Thirty and no/100

DOLLARS

FOR calculator

JOURNAL ENTRY

RECEIVED BY

Michael Smith

CASH RECEIPTS JOURNAL DATE

DOC. NO.

ACCOUNT NAME

GENERAL CREDIT

POST. REF.

1

7

2

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

CASH IN BANK DEBIT

SALES DISCOUNTS DEBIT

3 0 00

16 R303 Office Equipment

6

SALES CREDIT

13

PAGE

3 0 00

4

3

5

6 7

Posting to the Accounts Receivable Subsidiary Ledger A business posts daily from the Accounts Receivable Credit column to the accounts receivable subsidiary ledger so that customer accounts are always current. To post a cash receipt transaction to an account in the accounts receivable subsidiary ledger, follow these steps. Refer to Figure 16–9. 1. Enter the date of the transaction in the Date column of the subsidiary ledger account. 2. In the subsidiary ledger Posting Reference column, enter the journal letters and the page number. Use CR for the cash receipts journal. 3. In the subsidiary ledger Credit column, enter the amount from the Accounts Receivable Credit column of the cash receipts journal. 4. Compute and enter the new balance in the Balance column. If the account balance is zero, draw a line through the Balance column.

Figure 16–9 Posting from the Cash Receipts Journal to the Accounts Receivable Subsidiary Ledger

CASH RECEIPTS JOURNAL DATE 1 2

DOC. NO.

ACCOUNT NAME

20-Dec. 5 R301 Casey Klein

POST. REF.

GENERAL CREDIT

SALES CREDIT

PAGE

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

CASH IN BANK DEBIT 1

✓

2 1 2 00

2 1 2 00

5

3

1

NAME

2 3

3

Casey Klein 3345 Spring Creek Parkway, Plano, TX 75094

2

ADDRESS

DATE

20-Dec.

DESCRIPTION

1 Balance 1 5

POST. REF.

✓ S12 CR13

DEBIT

CREDIT

2 1 2 00 2 1 2 00

BALANCE

5 0 0 00 7 1 2 00 5 0 0 00 4

Section 2 The Cash Receipts Journal

448-479_CH16_868829.indd 463

13

463

4/17/06 7:04:22 AM

AS YOU

5. Return to the cash receipts journal and enter a check mark (✓) in the Posting Reference column.

READ

Key Point

Posting the General Credit Column

Posting from the Cash Receipts Journal When posting a cash receipts journal entry to the accounts receivable subsidiary ledger, be sure to post the amount recorded in the Accounts Receivable Credit column.

A business posts daily from the General Credit column of the cash receipts journal to the appropriate accounts in the general ledger. Refer to Figure 16–10 as you read the steps for posting amounts from this column. 1. Enter the transaction date in the general ledger account Date column. 2. Enter the journal letters and page number in the Posting Reference column of the ledger account. Use CR for cash receipts journal. 3. In the Credit column of the ledger account, enter the amount from the General Credit column of the cash receipts journal. 4. Compute and enter the new account balance in the proper Balance column. For the Office Equipment account shown in Figure 16–10, use the Debit Balance column. If the account balance is zero, draw a line through the appropriate Balance column. 5. Return to the cash receipts journal and enter the general ledger account number in the Posting Reference column. The cash receipts journal entry for the December 16 transaction is now posted. All transactions in the General Credit column are posted this way.

Footing, Proving, Totaling, and Ruling the Cash Receipts Journal Follow these steps to complete the cash receipts journal. Refer to Figure 16–11. 1. Draw a single rule across the six amount columns, just below the last transaction. 2. Foot the columns. 3. Test for the equality of debits and credits as follows.

Figure 16–10 Posting from the General Credit Column of the Cash Receipts Journal

CASH RECEIPTS JOURNAL DATE 1 2 3 4 5 6

DOC. NO.

20-Dec. 5 R301 12 R302 15 T55 15 T55 16 R303

ACCOUNT NAME

POST. REF.

GENERAL CREDIT

SALES CREDIT

PAGE

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

13

CASH IN BANK DEBIT 1

✓ Casey Klein South Branch H.S. Ath. ✓ – Cash Sales – Bankcard Sales 145 Office Equipment

2 1 2 00 1 5 0 0 00 3 0 0 0 00 7 0 0 00

3 0 00

1 8 0 00 4 2 00

3 0 00

2 1 2 00 1 4 7 0 00 3 1 8 0 00 7 4 2 00 3 0 00

7

2 3 4 5 6 7

1

DATE

20-Dec.

464

DESCRIPTION

1 Balance 16

5

3

ACCOUNT Office Equipment POST. REF.

ACCOUNT NO. 145

2

BALANCE DEBIT

✓ CR13

CREDIT

3 0 00

DEBIT

CREDIT

9 8 5 5 00 9 8 2 5 00 4

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 464

4/17/06 7:04:22 AM

Debit Columns Sales Discounts $ 30 Cash in Bank 17,283

Total

$ 17,313

Credit Columns General $ 30 Sales 9,700 Sales Tax Payable 582 Accounts Receivable 7,001 Total $ 17,313

AS YOU

READ

In Your Own Words What does it mean to “foot” the journal?

4. In the Date column, on the line below the single rule, enter the date the journal is being totaled. 5. On the same line in the Account Name column, enter the word Totals. 6. Enter the column totals, in ink, just below the footings. 7. Double-rule the amount columns. Review the completed cash receipts journal. Consider time saved by using this special journal to record cash receipts in one location instead of on many general journal pages. After the cash receipts journal is footed, proved, totaled, and ruled, the column totals are posted to the general ledger.

Posting Column Totals to the General Ledger On Your Mark uses a cash receipts journal with six amount columns. Only five of them are posted to the general ledger. The General Credit column total is not posted. The entries in this column have already been posted individually to the general ledger accounts. (See Figure 16–10.) The total in each amount column is posted to the general ledger account named in the column heading. See Figure 16–12 on page 467. The column heading indicates whether to post the amount to the ledger account’s Debit or Credit column.

Figure 16–11 Totaled and Ruled Cash Receipts Journal

CASH RECEIPTS JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

DOC. NO.

20-Dec. 5 R301 12 R302 15 T55 15 T55 16 R303 18 R304 20 R305 22 R306 23 R307 24 R308 26 R309 27 R310 27 R311 28 R312 31 T56 31 T56 31

ACCOUNT NAME

GENERAL CREDIT

SALES CREDIT

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

CASH IN BANK DEBIT 1

✓ Casey Klein South Branch H.S. Ath. ✓ – Cash Sales – Bankcard Sales 145 Office Equipment Break Point Sports Club ✓ ✓ Anita Montero ✓ Gabriel Ramos South Branch H.S. Ath. ✓ Tammy’s Fitness Club ✓ ✓ Kim Wong ✓ Lara Young ✓ Robert Galvin ✓ Joe Dimaio – Cash Sales – Bankcard Sales Totals

19

4

POST. REF.

13

PAGE

5

2 1 2 00 1 5 0 0 00 3 0 0 0 00 7 0 0 00

3 0 00

1 8 0 00 4 2 00

5 1

2 1 2 00 4 7 0 00 1 8 0 00 7 4 2 00 3 0 00 0 0 0 00 1 0 0 00 5 0 0 00 0 0 0 00 3 0 0 00 3 0 0 00 2 0 0 00 4 6 5 00 4 2 4 00 3 0 0 00 0 6 000

17

2 8 30 0

1 3

3 0 00 1

1 0 0 0 00 1 0 0 00 5 0 0 00 1 0 0 0 00 1 3 0 0 00 3 0 0 00 2 0 0 00 4 6 5 00 4 2 4 00

3 0 00

3 0 00 (✓)

5 0 0 0 00 1 0 0 0 00

3 0 0 00 6000

97 0 0 0 0

5 8 2 00

9 7 0 0 00

70 0 1 0 0

5 8 2 00

7 0 0 1 00

1 1

3 0 00

3 0 00 17 2 8 3 00

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

3

Section 2 The Cash Receipts Journal

448-479_CH16_868829.indd 465

2

1 2 6 7

465

4/17/06 7:04:22 AM

CULTURAL Diversity Misinterpreting Gestures Gestures

that are common in the United States can be offensive to other cultures. For example, the okay symbol (the thumb and forefinger making a circle) is considered rude in parts of South America and Eastern Europe.

Refer to Figure 16–12 on page 467 and follow these steps to post column totals to the general ledger. 1. Place a check mark in parentheses under the General Credit column total to indicate that this total is not posted. 2. Post the Sales total to the Sales account Credit column. 3. Post the Sales Tax Payable total to the Sales Tax Payable account Credit column. 4. Post the Accounts Receivable total to the Accounts Receivable controlling account Credit column. 5. Post the Sales Discounts total to the Sales Discounts account Debit column. 6. Post the Cash in Bank total to the Cash in Bank account Debit column. 7. Compute new balances for each general ledger account. 8. Write each account number in parentheses below the double rule in the cash receipts journal.

Using the Schedule of Accounts Receivable What Is a Schedule of Accounts Receivable? Accountants prepare a schedule for each subsidiary ledger to determine whether the subsidiary ledger’s sum equals the controlling account’s ending balance.

AS YOU

READ

It’s Not What It Seems Schedule You might think of a schedule as a timetable. In accounting, a schedule is a detailed list of the items that make up a general ledger account balance.

466

Proving the Accounts Receivable Subsidiary Ledger To prove the accounts receivable subsidiary ledger, accountants prepare a schedule of accounts receivable that lists each charge customer, the balance in the customer’s account, and the total amount due from all customers. The Accounts Receivable account is the controlling account for the accounts receivable subsidiary ledger. That is, the controlling account is a summary of all customer accounts in the subsidiary ledger. At month-end after all posting is completed, the balance of Accounts Receivable (controlling) in the general ledger should equal the total of the balances of the individual accounts receivable subsidiary ledger accounts. The schedule of accounts receivable may be prepared on plain paper, accounting stationery, or on a computer. The heading identifies the schedule type and the date. All customer accounts appear in alphabetical order, as they do in the accounts receivable subsidiary ledger. All accounts are included, even those with zero balances. This prevents omitting a customer by mistake. Figure 16–13 on page 468 shows On Your Mark’s schedule of accounts receivable for the end of December. Its total amount to be received from all customers is $10,404, which matches the balance of the Accounts Receivable account in the general ledger. This proves the accounts receivable subsidiary ledger.

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 466

4/17/06 7:04:23 AM

CASH RECEIPTS JOURNAL DOC. NO.

DATE 1 2

20-Dec. 5 R301 Casey Klein

18

SALES TAX PAYABLE CREDIT

SALES CREDIT

ACCOUNTS RECEIVABLE CREDIT

13

CASH IN BANK DEBIT

SALES DISCOUNTS DEBIT

1

✓

31 T56 Bankcard Sales 31 Totals

17

GENERAL CREDIT

POST. REF.

ACCOUNT NAME

PAGE

2 1 2 00 1 0 0 0 00

— 3 0 00

19

6 0 00

9 7 0 0 00

5 8 2 00

9 7 0 0 00 ( 401)

3 0 00 (✓)

5 8 2 00 ( 220)

7 0 0 1 00

3 0 00

7 0 0 1 00 ( 115)

2 1 2 00

2

1 0 6 0 00

17

17 2 8 3 00

3 0 00 17 2 8 3 00 ( 405) ( 101)

20

18 19 20

ACCOUNT Cash in Bank DATE

20-Dec.

ACCOUNT NO. 101

DESCRIPTION

1 Balance 31

BALANCE

POST. REF.

DEBIT

✓ CR13

17 2 8 3 00

CREDIT

DEBIT

15 0 0 0 00 32 2 8 3 00

ACCOUNT Accounts Receivable DATE

20-Dec.

ACCOUNT NO. 115 BALANCE

POST. REF.

DESCRIPTION

DEBIT

✓ G20 S12 CR13

1 Balance 4 31 31

CREDIT

DEBIT

6 6 17 10

1 5 9 00 11 3 0 5 00 7 0 0 1 00

259 100 405 404

CREDIT

00 00 00 00

ACCOUNT Sales Tax Payable DATE

20-Dec.

ACCOUNT NO. 220 BALANCE

POST. REF.

DESCRIPTION

DEBIT

✓ G20 S12 CR13

1 Balance 8 31 31

CREDIT

DEBIT

20-Dec.

1 1 1 2

5 5 5 00 5 8 2 00

00 00 00 00

BALANCE

POST. REF.

DEBIT

CREDIT

✓ S12 CR13

1 Balance 31 31

DESCRIPTION

1 Balance 31

DEBIT

CREDIT

300 0 0 0 00 310 7 5 0 00 320 4 5 0 00

10 7 5 0 00 9 7 0 0 00

ACCOUNT Sales Discounts

20-Dec.

300 291 846 428

ACCOUNT NO. 401 DESCRIPTION

DATE

CREDIT

9 00

ACCOUNT Sales DATE

CREDIT

ACCOUNT NO. 405 POST. REF.

✓ CR13

BALANCE DEBIT

3 0 00

CREDIT

DEBIT

CREDIT

7 0 0 00 7 3 0 00

Figure 16–12 Posting Column Totals from the Cash Receipts Journal

Section 2 The Cash Receipts Journal

448-479_CH16_868829.indd 467

467

4/17/06 7:04:23 AM

ACCOUNT Accounts Receivable DATE

20-Dec.

ACCOUNT NO. 115

DESCRIPTION

✓ G20 S12 CR13

1 Balance 4 31 31

BALANCE

POST. REF.

DEBIT

CREDIT

1 5 9 00 11 3 0 5 00 7 0 0 1 00

DEBIT

6 6 17 10

259 100 405 404

CREDIT

00 00 00 00

On Your Mark Athletic Wear Schedule of Accounts Receivable December 31, 20-Break Point Sports Club Joe Dimaio Robert Galvin Casey Klein Anita Montero Shashi Rahim Gabriel Ramos South Branch High School Athletics Megan Sullivan Tammy’s Fitness Club Kim Wong Lara Young Total Accounts Receivable

Figure 16–13 Schedule of Accounts Receivable

3 7 1 0 00

500 371 212 318 1 000 530 1 060 106 2 597

The balance of the Accounts Receivable account should equal the total of the schedule of accounts receivable.

00 00 00 00 00 00 00 00 00 10 4 0 4 00

Detecting Errors in the Subsidiary Ledger Proving the accounts receivable subsidiary ledger with the controlling account verifies that the sum of the subsidiary ledger equals the controlling account’s ending balance. This internal control procedure uncovers certain errors such as failing to post a transaction, or miscalculating an account balance. It does not ensure that transactions were posted to the correct customer account. The subsidiary ledger and the controlling account can balance even if an amount was posted to the wrong account. Often this type of error is discovered when a customer finds the error on a bill and reports it.

Internet Sales How Do Internet Companies Receive Cash? Companies can sell products with little expense and effort over the Internet, but they must have procedures and systems for processing online sales transactions. Companies can use an Internet merchant account for credit and debit card payments or an online payment service such as PayPal. Most Internet sales systems batch transactions daily to provide updated sales and inventory entries for the company’s computer systems. Online sales transactions must be secure. Businesses can use a card verification service to authenticate credit card security codes and personal identification data to protect against online fraud. 468

Chapter 16 Special Journals: Sales and Cash Receipts

448-479_CH16_868829.indd 468

4/17/06 7:04:23 AM

Assessment

SECTION 2 AFTER YOU

READ

Reinforce the Main Idea Create a table similar to this one to identify the journal to be used and the accounts to be debited and credited for each transaction.

4RANSACTION

*OURNAL

!CCOUNTS $EBITED

!CCOUNTS #REDITED

"ANKCARD3ALES 3ALEOF-ERCHANDISEON!CCOUNT 3ALEOF!SSETFOR#ASH #ASH3ALES

Do the Math You are hired to audit the books for a computer software retailer, Software Biz. As you review the books, you realize that the sales tax was not calculated on a sales slip. You also want to estimate cash receipts from a sale. On a separate sheet of paper, make the following calculations: 1. Accounts Receivable—Business World; Sales Slip 47: software for $550; sales tax at 6%. What is the total due? 2. Accounts Receivable—Cindy Caskey; Sales Slip 48:

Software Sales tax Total

$46.53 2.79 $49.32

Terms: 1/10, n/30. How much will be received if it is paid within the discount period?

Problem 16–3 Completing the Cash Receipts Journal The cash receipts journal for the month of January is provided in your working papers and illustrated here.

Instructions In your working papers, foot, prove, total, and rule the cash receipts journal. CASH RECEIPTS JOURNAL DATE 1 2 3 4 5 6 7 8

20-Jan.

DOC. NO.

ACCOUNT NAME

POST. REF.

GENERAL CREDIT

PAGE

SALES TAX PAYABLE CREDIT

SALES CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

1

3 R502 5 R503 8 R504 15 T42 15 T42 20 R505 30 R506

Jennifer Smith Wilton High School Store Equipment Cash Sales Bankcard Sales Norwin High School Supplies

✓ ✓ 155 — — ✓ 115

8 0 00 3 1 0 0 00

6 2 00

3

4 8 00

5 1 2

7 5 00 5 0 0 0 00 1 2 0 0 00

3 0 0 00 7 2 00 2 4 0 0 00

3 0 00

9

8 0 00 0 3 8 00 7 5 00 3 0 0 00 2 7 2 00 3 5 2 00 3 0 00

2 3 4 5 6 7 8 9

Section 2 The Cash Receipts Journal

448-479_CH16_868829.indd 469

10

CASH IN BANK DEBIT

469

4/17/06 7:04:25 AM

CH A P T ER 16

Summary

Key Concepts 1. Businesses that have many transactions use special journals to simplify the process of recording transactions. Special journals • have amount columns to record debits and credits to specific general ledger accounts • use one line to record most transactions Four special journals are commonly used in merchandising businesses: • sales journal • cash receipts journal

• purchases journal • cash payments journal

2. A sales journal is used when two conditions are met: • merchandise is sold, and • the sale is on account instead of for cash The sales journal entry to record the sale of merchandise on account is illustrated here. SALES JOURNAL SALES SLIP NO.

DATE 1

POST. REF.

CUSTOMER’S ACCOUNT DEBITED

3

SALES TAX PAYABLE CREDIT

SALES CREDIT

Sales Customer’s Account Name Slip No.

Date

2

1

PAGE

x x x xx

ACCOUNTS RECEIVABLE DEBIT

x x xx

x x x xx

1 2 3

The cash receipts journal is used to record all cash that a business receives. The following types of transactions are recorded in the cash receipts journal: (a) (b) (c) (d) (e)

cash received from a charge customer cash received from a charge customer less a cash discount cash sales bankcard sales cash received from the sale of other assets CASH RECEIPTS JOURNAL

DATE

(a)

1

(b)

2

(c)

3

(d)

4

(e)

5

470

DOC. NO.

ACCOUNT NAME

Date of Receipt Customer’s Name Receipt No. Date of Receipt Customer’s Name Receipt No. Date of Tape Cash Sales Tape No. Date of Tape Bankcard Sales Tape No. Date of Receipt Account Affected Receipt No.

POST. REF.

GENERAL CREDIT

SALES CREDIT

PAGE

SALES TAX PAYABLE CREDIT

ACCOUNTS RECEIVABLE CREDIT

SALES DISCOUNTS DEBIT

x x x xx x x x xx

x x x xx

x x xx

1

CASH IN BANK DEBIT

x x x xx

1

x x x xx

2

x x x xx

x x xx

x x x xx

3

x x x xx

x x xx

x x x xx

4

x x x xx

5

Chapter 16 Summary

448-479_CH16_868829.indd 470

4/17/06 7:04:27 AM

C HAPT E R 1 6

Summary

3. Post these columns’ individual amounts daily: Journal

Individual Column Amounts

Are Posted To:

Sales Journal

Accounts Receivable Debit column

➤ Subsidiary ledger customer account

Cash Receipts Journal

Accounts Receivable Credit column

➤ Subsidiary ledger customer account

General Credit column

➤ General ledger account

4. Complete seven steps before you post special journal column totals to the general ledger: (a) (b) (c) (d) (e)

Rule the amount columns. Foot the amount columns. Prove the journal. Under the last transaction, enter the date the journal is totaled in the Date column. On the same line, enter the word Totals in the Customer’s Account Debited column (sales journal) or the Account Name column (cash receipts journal). (f) Enter the column totals, in ink, just below the footings. (g) Double-rule the amount columns. 5. Post these column totals at month-end: Journal

Column Total

Sales Journal

Sales Credit column

➤ Sales account

Sales Tax Payable Credit column

➤ Sales Tax Payable account

Accounts Receivable Debit column

➤ Accounts Receivable account

Cash Receipts Sales Credit column Journal Sales Tax Payable Credit column

Is Posted To:

➤ Sales account ➤ Sales Tax Payable account

Accounts Receivable Credit column

➤ Accounts Receivable account

Sales Discounts Debit column

➤ Sales Discounts account

Cash in Bank Debit column

➤ Cash in Bank account

6. To prove the accounts receivable subsidiary ledger, prepare a schedule of accounts receivable, which lists each charge customer, the balance in the customer’s account, and the total amount due from all customers. Accounts Receivable is the controlling account for the accounts receivable subsidiary ledger. Review this relationship in Figure 16–13 on page 468.

Key Terms cash receipts journal (p. 459) footing

(p. 453)

schedule of accounts receivable (p. 466)

sales journal

(p. 450)

special journals

(p. 450)

Chapter 16 Summary

448-479_CH16_868829.indd 471

471

4/17/06 7:04:29 AM

C H A P T ER 16 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Special Journals a. When are special journals used in an accounting system? b. Name four commonly used special journals and describe the transactions entered in each. Sales Journal and Cash Receipts Journal a. List the steps to record transactions in the sales journal. b. What are the source documents for transactions recorded in the cash receipts journal? Posting Single Transactions a. When are sales transactions posted to the accounts receivable subsidiary ledger? Why? b. When are transactions in the cash receipts journal posted to the accounts receivable subsidiary ledger? Why? Footing, Proving, Totaling, and Ruling a. What is a footing? b. Which columns in the sales journal are double-ruled? What does the double rule indicate? Posting Column Totals a. Which sales journal column total is posted to the general ledger Sales account? b. When posting column totals from the cash receipts journal to the general ledger, which total is not posted? Schedule of Accounts Receivable a. What is the purpose of a schedule of accounts receivable? b. The schedule of accounts receivable does not uncover what type of error?

Apply Key Terms Imagine that you are the accounting manager for EarthWear Clothing. Recently you noticed that several sales associates are not keeping good records of sales transactions. Write an informational memorandum to the sales staff about the need for accurate, complete sales records. Use the following terms to describe a systematic method to track sales. cash receipts journal footing sales journal

472

schedule of accounts receivable special journals

Chapter 16 Review and Activities

448-479_CH16_868829.indd 472

4/17/06 7:04:31 AM

Computerized Accounting

C HAPT E R 1 6

Mastering Sales and Cash Receipts Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Setting up customer records

• Ledger sheets or cards are prepared with customer account details such as customer name, address, and contact information. • Account activities are posted to the customer’s subsidiary ledger account.

• Assign each customer an ID code. • Record details of customer accounts into customer records. • The customer’s sales and payment history is maintained automatically.

Issuing and Recording a Credit Memorandum

• A credit memorandum is prepared. • A journal entry is prepared to record the credit memorandum. • The journal entry is posted to the customer’s account and to the general ledger.

• The accounting software will create a credit memo and apply it to the appropriate outstanding customer invoice. • The credit memo is posted automatically to the customer account and to the general ledger.

Q&A Peachtree Question

Answer

How do I set up a new customer account?

1. 2. 3. 4. 5.

From the Maintain menu, select Customers/Prospects. Assign a Customer ID to the customer account. Enter customer name and contact information. Click on the Sales Defaults tab. Verify or enter the appropriate sales default GL account number.

How do I issue and record a credit memorandum?

1. From the Tasks menu, select Sales/Invoicing. 2. Enter a customer ID and a reference number. 3. Click on the Apply to Sales tab and fill out the Apply to Invoice.

QuickBooks Q & A QuickBooks Question

Answer

How do I set up a new customer account?

1. 2. 3. 4.

From the Lists menu, select Customer:Job List. Click the Customer:Job drop-down list and select New. Enter customer name and contact information. Click on the Additional Info tab and enter any additional customer data.

How do I issue and record a credit memorandum?

1. 2. 3. 4.

From the Customers menu, select Create Credit Memos/Refunds. Enter customer name, date, and credit invoice number. In the Item column, select the item returned. Enter the number returned in the Qty field.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 16 Computerized Accounting

448-479_CH16_868829.indd 473

473

4/17/06 7:04:48 AM

C H A P T ER 16 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 16–4 1. Select the problem set for Shutterbug Cameras (Prob. 16–4). 2. Rename the company and set the system date. 3. Enter all sales on account transactions using the Sales/ Invoicing option. 4. Record all cash sales using the Receipts option. 5. Print a Sales Journal report and a Cash Receipts Journal report. 6. Proof your work. 7. Print a General Ledger report and Customer Ledgers report. 8. Complete the Analyze activity. 9. End the session.

TIP: When you print a report, such as the General Ledger, you can use the filter options to customize the information that appears on the report.

Problems Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 16–4 Recording and Posting Sales Transactions Shutterbug Cameras records its transactions in special journals. The accounts receivable subsidiary ledger and certain general ledger accounts are included in your working papers.

Instructions In your working papers: 1. Record each transaction on page 12 of the sales journal or on page 13 of the cash receipts journal. 2. Post to the customer accounts in the accounts receivable subsidiary ledger on a daily basis. 3. Foot, prove, total, and rule the sales journal. 4. Post the column totals from the sales journal and the cash receipts journal to the general ledger accounts named in the column headings. 5. Prepare a schedule of accounts receivable. Date

May

Transactions

1 Sold merchandise on account to Yoko Nakata, $500 plus 4% sales tax of $20, Sales Slip 220. 3 Cash sales totaled $1,500 plus $60 in sales tax, Tape 10. 7 Cash sales totaled $200 plus $8 in sales tax, Tape 11. 9 Sold merchandise on account to Heather Sullivan for $100 plus sales tax of $4, Sales Slip 223. 12 Cash sales totaled $400 plus $16 in sales tax, Tape 12. 15 Sold $3,000 in merchandise on account to FastForward Productions plus sales tax of $120, Sales Slip 225. 18 Sold merchandise on account to Yoko Nakata, $200 plus sales tax of $8, Sales Slip 226.

Analyze

Based on these transactions, calculate how much cash was collected for the month.

Problem 16–5 Recording and Posting Cash Receipts River’s Edge Canoe & Kayak uses special journals and an accounts receivable subsidiary ledger for recording business transactions. The accounts receivable subsidiary ledger accounts and certain general ledger accounts are included in your working papers. The current account balances are recorded in the accounts.

474

Chapter 16 Problems

448-479_CH16_868829.indd 474

4/17/06 7:04:50 AM

C HAPT E R 1 6

Problems Instructions In your working papers:

SMART GUIDE

1. Record the transactions on page 7 in the cash receipts journal. 2. Post the amounts from the Accounts Receivable Credit column to the customers’ accounts in the accounts receivable subsidiary ledger. Post the individual amounts in the General Credit column to the general ledger accounts. 3. Foot, prove, total, and rule the cash receipts journal. 4. Post the column totals to the general ledger accounts named in the column headings. 5. Prepare a schedule of accounts receivable. Date

May

Step–by–Step Instructions: Problem 16–5 1. Select the problem set for River’s Edge Canoe & Kayak (Prob. 16–5). 2. Rename the company and set the system date. 3. Record all cash receipts using the Receipts option. 4. Print the following reports: Cash Receipts Journal, General Ledger, and Customer Ledgers. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

Transactions

2 Received $400 from Paul Drake to apply on his account, Receipt 505. 5 Received $2,940 from Adventure River Tours in payment of its $3,000 account less a 2% cash discount of $60, Receipt 506. 7 Sold old shelving (Store Equipment) for $50, Receipt 507. 10 Wildwood Resorts sent us a check for $2,425 in payment of its account, $2,500 less a 3% cash discount of $75, Receipt 508. 15 Cash sales totaled $2,000 plus $100 in sales tax, Tape 20. 15 Bankcard sales were $3,000 plus $150 in sales tax, Tape 20. 18 Celeste Everett sent us a check for $150 to apply on her account, Receipt 509. 20 Isabel Rodriquez sent us $100 to apply on her account, Receipt 510. 30 Cash sales were $4,500 plus $225 sales tax, Tape 21. Bankcard sales totaled $3,800 plus sales tax of $190, Tape 21.

Analyze

CHALLENGE PROBLEM

TIP: You can apply a partial payment from a customer.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 16–5

Identify the source document that would be used to record bankcard sales and cash sales.

Problem 16–6 Recording and Posting Sales and Cash Receipts

Buzz Newsstand had the following sales and cash receipt transactions for May. In your working papers, the accounts receivable subsidiary ledger and general ledger accounts have been opened with current balances.

Instructions 1. Record the sales and cash receipts for May on page 11 of the sales journal and page 11 of the cash receipts journal. 2. Post to the customer accounts in the accounts receivable subsidiary ledger on a daily basis. 3. Post from the General Credit column of the cash receipts journal on a daily basis.

1. Restore the Problem 16-5.QBB file. 2. Enter all cash receipts using the Receive Payments option. 3. Print a Journal report, a Customer Balance Summary, and a General Ledger. 4. Proof your work. 5. Complete the Analyze activity. 6. Back up your work.

SOURCE DOCUMENT PROBLEM Problem 16–6 Use the source documents in your working papers to complete this problem.

CONTINUE

Chapter 16 Problems

448-479_CH16_868829.indd 475

475

4/17/06 7:04:52 AM

C H A P T ER 16

SMART GUIDE Step–by–Step Instructions: Problem 16–6 1. Select the problem set for Buzz Newsstand (Prob. 16–6). 2. Rename the company and set the system date. 3. Enter all sales on account transactions. 4. Record all cash receipts. 5. Print a Sales Journal report and a Cash Receipts Journal report. 6. Proof your work. 7. Print a General Ledger report and Customer Ledgers report. 8. Complete the Analyze activity. 9. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 16–6 1. Restore the Problem 16-6.QBB file. 2. Enter all sales on account transactions. 3. Record all cash receipts. 4. Print a Journal report, a Customer Balance Summary, and a General Ledger report. 5. Proof your work. 6. Complete the Analyze activity. 7. Back up your work.

Problems 4. Foot, prove, total, and rule both journals. 5. Post the column totals of the sales journal to the general ledger accounts named in the column headings. 6. Post the column totals from the cash receipts journal to the general ledger accounts named in the column headings. 7. Prepare a schedule of accounts receivable. Date

May

1 Sold $300 in merchandise plus 6% sales tax of $18 on account to Ilya Bodonski, Sales Slip 170. 3 Received $490 from Katz Properties in payment of its $500 account balance less a 2% discount of $10, Receipt 145. 5 As a favor, sold $60 in supplies to Straka Stores, received cash, Receipt 146. 7 Rothwell Management Inc. sent us a check for $294 in payment of its $300 account balance less a $6 cash discount, Receipt 147. 9 Sold $100 in merchandise plus $6 sales tax on account to Saba Nadal, Sales Slip 171. 10 Sold $600 in merchandise plus $36 sales tax on account to Java Shops Inc., terms 2/10, n/30, Sales Slip 172. 12 Sold $50 in merchandise plus $3 sales tax on account to Lee Adkins, Sales Slip 173. 15 Received a check for $196 from Rolling Hills Pharmacies in payment of its $200 account less a 2% cash discount of $4, Receipt 148. 15 Cash sales were $2,400 plus $144 sales tax, Tape 33. 15 Bankcard sales totaled $2,000 plus sales tax of $120, Tape 33. 18 Sold $1,000 in merchandise plus sales tax of $60 on account to Katz Properties, terms 2/10, n/30, Sales Slip 174. 20 Received $100 from Ilya Bodonski to apply on her account, Receipt 149. 22 Sold $800 in merchandise plus $48 sales tax on account to Rothwell Management Inc., terms 2/10, n/30, Sales Slip 175. 23 Lee Adkins sent us a check for $53 in payment of his account, Receipt 150. 24 Received a $106 check from Saba Nadal to apply on account, Receipt 151. 26 Java Shops Inc. sent us a check for $200 to apply on account, Receipt 152. 27 Sold $200 in merchandise plus sales tax of $12 on account to Lee Adkins, Sales Slip 176. 28 Received $75 from the sale of excess store equipment, Receipt 153. 30 Cash sales totaled $2,600 plus $156 sales tax, Tape 34. 30 Bankcard sales were $2,200 plus sales tax of $132, Tape 34.

Analyze

476

Transactions

Calculate the percent of sales discounts given in May to total May sales.

Chapter 16 Problems

448-479_CH16_868829.indd 476

4/17/06 7:04:53 AM

Winning Competitive Events

C HAPT E R 1 6

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. ABC Corporation uses special journals to account for detailed transactions. Which of the following would not be considered a special journal? a. purchases journal b. cash payments journal c. sales journal d. general journal e. none of these answers 2. Check marks are placed in parentheses below both General amount column totals in a journal to show that the column totals a. are not posted. b. have been posted. c. balance. d. none of the above 3. The Accounts Receivable controlling account in the general ledger a. shows the total amount owed by all customers when posting is complete. b. helps keep the general ledger a balancing ledger in which debits equal credits. c. offers a means of testing the accuracy of the customer account balances. d. does all of the foregoing. e. does none of the foregoing. 4. A journal amount column that is not headed with an account name is called a a. special amount column. b. general amount column. c. date column. d. posting reference column. e. none of these answers

Business Professionals of America MULTIPLE CHOICE 5. A list of all customer accounts, account balances, and total amount due from all customers is a Need More Help? a. Schedule of Accounts Payable. Go to glencoeaccounting.glencoe.com and b. Worksheet. click on Student Center. Click on Winning c. Schedule of Accounts Competitive Events and select Chapter 16. Receivable. • Practice Questions and Test-Taking Tips d. none of the above • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

448-479_CH16_868829.indd 477

Chapter 16 Winning Competitive Events

477

4/17/06 7:04:54 AM

C H A P T ER 16 Critical Thinking

Special Journals: Sales and Cash Receipts

CASE

STUDY

Merchandising Business: Movie Theater

ETHICS

Working for a Competitor

a mattoefr

))

$ )) Communicating ACCOUNTING

478

Real-World Applications and Connections

1. Describe the purpose of a special journal. 2. How is the sales journal different from the cash receipts journal? 3. Your new job assignment is to prove the accounts receivable subsidiary ledger. All postings have been made. What do you do to prove the ledger? 4. Compare and contrast the receipt of cash from a charge customer with the receipt of cash at the time of the merchandise sale. 5. The schedule of accounts receivable total does not agree with the general ledger’s Accounts Receivable balance. Develop a plan to locate the error(s). 6. What is the value of maintaining special journals?

You work in the accounting department for Springdale Movie Theater. The owners are considering enlarging the concession area one and one-half times its current size to offer a wider variety of foods. No theater seats would be lost. The cost is estimated at $200,000. Sales figures for the past three years follow. Year Ticket Sales Concession Sales Year 1 $4,800,000 $1,800,000 Year 2 5,100,000 1,600,000 Year 3 5,400,000 1,480,000 INSTRUCTIONS 1. Use a spreadsheet program to analyze the sales and planned expansion. What percent of total sales are ticket sales and concession sales each year? 2. Assuming concession sales remain at $1,480,000, what percentage increase in concession revenue is needed to pay for the renovation costs in one year?

Accounting clerks use sales journals to record sales on account, giving them direct access to the company’s customer lists. As an accounting clerk at Haverty’s Furniture Store, you work with Bob, a part-time accounting clerk. Recently Bob confided in you that during the mornings, he works at World Classic Furniture, a competitor of Haverty’s. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Explaining a Transaction You work for Equestrian Steps—Horse Boarding and Lessons. During an equestrian competition last weekend, you purchased grain on account from the local feed store for $85 plus 6% sales tax. On a separate sheet of paper, write a brief memo to the accounting clerk explaining the transaction so she can record it in the accounting records.

Chapter 16 Real-World Applications and Connections

448-479_CH16_868829.indd 478

4/17/06 7:04:56 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Designing and Improving Systems At Ice Cream Express, you keep the financial records and maintain inventory. You noticed that some ice cream flavors are popular only during certain seasons. For example peppermint ice cream is very popular during winter but not in the summer. You decide to get feedback about your customers’ likes and dislikes. INSTRUCTIONS Design a survey that will help identify your customers’ preferences. Include questions to gather data about respondents’ gender, age, and income level. What incentives will you offer to prompt customers to participate?

Tariffs and Duties Thinking of boosting your company’s sales by selling products in another country? Consider the impact of tariffs. A tariff, or duty, is a tax imposed on imports of specific products. For example if your U.S.-based company sells computer hardware in Venezuela, a 5 percent tariff will be charged on each item. INSTRUCTIONS Assume that Venezuelan competitors sell Model AB computer monitors for $210. You typically charge $205. Will your price be competitive after considering the tariff? Why or why not?

Examining Your Currency You have learned that businesses have cash receipts in various forms including transactions with charge cards and bankcards; checks; and currency. PERSONAL FINANCE ACTIVITY What do you know about the cash you use? Write a brief report about U.S. paper currency. Address what they are made of, the seven denominations in circulation today and the portrait appearing on each, the purpose of a security thread, and whether torn bills are acceptable. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 16.

Interpreting Sales In addition to financial results, most annual reports contain management’s analysis and interpretation of the financial data. For example if revenue has increased, the report might provide reasons for the increase and projections for the next fiscal period. Safe and Secure INSTRUCTIONS Use the Fiscal 2003 Compared to Always research the company Fiscal 2002 section of PETsMART’s annual report before buying something on the in Appendix F to answer these questions. Internet. Beware of scams! Visit 1. Did store sales increase or decrease over the glencoeaccounting prior year? What reasons are given for this .glencoe.com and click on Student Center. Click on change? WebQuest and select Unit 4 to 2. Why would an analysis of sales be continue your Internet project. important to people reading an annual report?

glencoeaccounting.glencoe.com

448-479_CH16_868829.indd 479

C HAPT E R 1 6

Chapter 16 Real-World Applications and Connections

479

4/17/06 7:04:59 AM

CH A P T ER 17

Special Journals: Purchases and Cash Payments

What You’ll Learn 1.

Explain the purpose of the purchases and cash payments journals.

2.

Record transactions in the purchases and cash payments journals.

3.

Record payroll transactions in the cash payments journal.

4.

Post from the purchases and cash payments journals to the general ledger and the accounts payable subsidiary ledger.

5.

Total, prove, and rule the purchases and cash payments journals.

BEFORE YOU

READ

Predict 1. 2. 3. 4.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business LOOKING AT THE ROLE OF PURCHASES

Adler Planetarium & Astronomy Museum Millions of people visit Chicago’s Adler Planetarium & Astronomy Museum where the sky’s the limit when it comes to finding new ways to view the cosmos. If you want to know more about our galaxy, the Adler has something for you.

6.

Prepare a schedule of accounts payable.

7.

Prove cash.

8.

Define the accounting terms introduced in this chapter.

Café buys food and utensils. Exhibits might need giant models

Why It’s Important

telescopes, and jewelry. The museum’s accounting system

▲

Cash must be protected and accounted for.

Visitors can observe a simulated night sky in action on the Sky Theater’s 68-foot dome or build a solar system on a computer. Operations like the Adler make many purchases. Its Galileo of planets or moons. The gift shop needs to stock puzzles, documents each purchase.

What Do You Think? When the Adler Planetarium gift shop purchases items for resale, what general ledger accounts are affected?

480

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 480

9/16/05 11:41:35 AM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Do you, or anyone you know, make regular payments to anyone—perhaps for car insurance or for a purchase you made on an installment plan? Businesses make many similar payments. Retail businesses buy the merchandise they sell to customers. They also buy many items used to operate the business, such as china and silverware for a restaurant. Businesses buy most items on credit and must keep track of when payments are due. You will learn how that is done in the accounting records as you study this chapter.

Personal Connection 1. What items might your employer buy on credit? 2. Do you have any ideas on how you might keep track of purchases and when payments are due on those items?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 17.

glencoeaccounting.glencoe.com

480-515_CH17_868829.indd 481

481

9/16/05 11:42:09 AM

The Purchases Journal

SECTION 1

BEFORE YOU

READ

Main Idea

The purchases journal is used to record credit purchases.

Read to Learn… ➤ how to use the purchases

journal. (p. 482) ➤ how to post transactions from the purchases journal. (p. 484)

Key Terms purchases journal

In the last chapter, you learned that businesses use special journals to record transactions that are similar and occur frequently. If the accounting system were like a transit system, special journals would be like traffic police in helping avoid accounting traffic jams by chan neling incoming data into appropriate “lanes.” They also provide a shortcut for much of the data headed for the general ledger. You also learned in the last chapter that the sales and cash receipts journals record the sale of merchandise and other assets. In this chapter you will learn how accountants use purchases and cash payments journals to record the purchase of merchandise and other assets. You will also learn about the accounts payable subsidiary ledger. Businesses like Target purchase merchandise for resale from hundreds of suppliers. Target and other companies use purchases and cash payments journals to simplify the purchase and payment processes.

Using the Purchases Journal What Is the Purpose of the Purchases Journal?

Figure 17–1 Purchases Journal

Accountants use the purchases journal as a special journal to record all purchases on account. Figure 17–1 shows the purchases journal that On Your Mark Athletic Wear uses. The purchases journal includes space for the page number, a column for the date, a column for the invoice number, a column for the name of the creditor, and a column for the posting reference. It also has three amount PURCHASES JOURNAL

DATE

INVOICE NO.

CREDITOR’S ACCOUNT CREDITED

POST. REF.

ACCOUNTS PAYABLE CREDIT

PAGE GENERAL

PURCHASES DEBIT

ACCOUNT DEBITED

POST. REF.

DEBIT

1

1

2

2

3

3

Used to record increases in the accounts payable subsidiary ledger and Accounts Payable controlling account.

482

Used to record amounts of purchases of merchandise on account.

Used to enter debits to general ledger accounts for which there are no special columns.

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 482

9/16/05 11:42:39 AM

columns. Refer to Figure 17–1 for a description of what amounts should be recorded in each column.

AS YOU

READ

Key Point

Recording the Purchase of Merchandise on Account

Purchasing Merchandise on Account Debit Purchases Credit Accounts Payable

After verifying an invoice, the accounting clerk records the purchase in the purchases journal. Refer to the purchases journal and follow these steps: 1. Enter the date in the Date column. Use the date the invoice was received, not the date the invoice was prepared. 2. Enter the invoice number in the Invoice Number column. 3. Enter the creditor’s name in the Creditor’s Account Credited column. 4. Enter the total of the invoice in the Accounts Payable Credit column. 5. For purchases of merchandise on account, enter the total amount of the invoice in the Purchases Debit column.

INVOICE NO. 7894

EC. C’D D

RE

B u s i n e s s Tr a n s a c t i o n

On Your Mark Athletic Wear 595 Leslie Street Dallas, TX 75207

TO

On December 14 On Your Mark received Invoice 7894 from Pro Runner Warehouse for merchandise purchased on account, $2,300, terms 2/10, n/30.

QTY.

20 pair 10 pair 10 pair 10 pair

-14, 20 DATE: ORDER NO.: SHIPPED BY: TERMS:

ITEM

Discount:

JOURNAL ENTRY

Net Amount:

TOTAL

UNIT PRICE

$ 1,000.00 500.00 400.00 400.00 $ 2,300.00

$ 50.00 50.00 40.00 40.00

Soft Cushion: White, #94682 Soft Cushion: Black, #94788 Low Cut: White, #94281 Low Cut: Black, #94666 Due Date:

Dec. 14, 20-9784 Federal Trucking 2/10, n/30

Total

12/24 $ 46.00 $ 2,254.00

Check No.:

PURCHASES JOURNAL DATE

6

1

7

INVOICE CREDITOR’S ACCOUNT CREDITED POST. NO. REF.

14 7894 Pro Runner Warehouse

2

3

ACCOUNTS PAYABLE CREDIT

2 3 0 0 00

4

PAGE

12

GENERAL PURCHASES DEBIT

ACCOUNT DEBITED

POST. REF.

DEBIT

2 3 0 0 00

6

5

7

After journalizing the invoice from Pro Runner Warehouse, the accounting clerk places it in a tickler file by due date. In this case it is filed in the December 24 folder. On Your Mark plans to take the discount, and December 24 is ten days after the invoice date.

Journalizing Other Purchases on Account On Your Mark also purchases supplies and other assets on account. These purchases do not occur often enough to set up special columns in the purchases journal. When these purchases do occur, they are recorded in the General Debit column of the purchases journal. Refer to the purchases journal on page 484 and follow these steps: 1. 2. 3. 4.

Enter the date the invoice was received in the Date column. Enter the invoice number in the Invoice Number column. Enter the creditor’s name in the Creditor’s Account Credited column. Enter the total of the invoice in the Accounts Payable Credit column.

AS YOU

READ

Instant Recall Merchandisers A merchandising business purchases merchandise from a supplier and resells it.

Section 1 The Purchases Journal

480-515_CH17_868829.indd 483

483

9/16/05 11:43:03 AM

CHAMPION STORE SUPPLY

B u s i n e s s Tr a n s a c t i o n

47249 Randall Parkway

REC’D

Dallas, TX 75207

On December 15 On Your Mark received Invoice 3417, dated December 13, from Champion Store Supply for store equipment bought on account, $1,200, terms n/30.

TO

On Your Mark Athletic Wear 595 Leslie Street Dallas, TX 75207

QTY.

3 1

DEC.

INVOICE NO. 3417

--

15, 20

DATE: ORDER NO.: SHIPPED BY: TERMS:

ITEM

Dec. 13, 20-9795 Federal Trucking n/30

$ 300.00 300.00

$

900.00 300.00 $ 1,200.00

Total Due Date: Discount:

JOURNAL ENTRY

Net Amount:

TOTAL

UNIT PRICE

Corner Shelf Units Shirt Rack

1/12 $0.00 $1,200.00

Check No.:

PURCHASES JOURNAL DATE

7 8

1

INVOICE CREDITOR’S ACCOUNT CREDITED POST. NO. REF.

15 3417 Champion Store Supply

2

3

ACCOUNTS PAYABLE CREDIT

12

PAGE GENERAL

PURCHASES DEBIT

1 2 0 0 00

4

ACCOUNT DEBITED

Store Equipment

5

POST. REF.

DEBIT

1 2 0 0 00

6

7 8

5. Store equipment is not merchandise purchased for resale, so this transaction is not recorded in the Purchases Debit column. Instead, it is recorded in the General column. Write the name of the general ledger account being debited in the General Account Debited column. 6. Enter the total amount of the invoice in the General Debit column. After journalizing the invoice, the accounting clerk places it in the tickler file. Because Champion Store Supply does not offer its credit customers a cash discount, the due date is January 12, 30 days after the date of the invoice. The invoice is filed in folder “12” to indicate this date.

Posting from the Purchases Journal How Do You Post Entries from the Purchases Journal? As you have learned, special journals save time in recording and posting business transactions. Each transaction in the purchases journal is a purchase on account. Therefore, each transaction is separately posted daily to the accounts payable subsidiary ledger to keep creditor accounts current. Refer to Figure 17–2 as you read about posting to the accounts payable subsidiary ledger. 1. In the Date column of the subsidiary ledger account, enter the date of the transaction. 2. In the Posting Reference column of the subsidiary ledger account, record the journal letter and the page number. P is the letter used for the purchases journal. 3. In the Credit column of the subsidiary ledger account, enter the amount owed to the creditor. 4. Compute the new account balance by adding the amount in the Credit column to the previous balance amount. Since there was no previous balance in Pro Runner’s account, enter $2,300 in the Balance column. 484

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 484

9/16/05 11:43:06 AM

PURCHASES JOURNAL DATE 1 2

INVOICE NO.

CREDITOR’S ACCOUNT CREDITED

20-Dec. 8 CS56 Computer Solutions 14 7894 Pro Runner Warehouse

6 7

POST. REF.

ACCOUNTS PAYABLE CREDIT

20-Dec.

GENERAL PURCHASES DEBIT

ACCOUNT DEBITED

POST. REF.

DEBIT 1

8 0 000

8 0 000

2

✓

2 3 0 000

2 3 0 000

6

5

7

Pro Runner Warehouse ADDRESS 22009 Ben White Blvd., Austin, TX 78705 DATE

12

✓

NAME

1

PAGE

DESCRIPTION

14

POST. REF.

2

3

DEBIT

P12

CREDIT

2 3 0 0 00

BALANCE

2 3 0 0 00

4

Figure 17–2 Posting from the Purchases Journal to the Accounts Payable Subsidiary Ledger 5. Return to the purchases journal and place a check mark (✓) in the first Posting Reference column (next to the Creditor’s Account Credited column).

Posting from the General Debit Column The clerk makes daily postings from the General Debit column of the purchases journal to the appropriate accounts in the general ledger. Refer to Figure 17–3 on page 486 as you read the following steps: 1. Enter the date of the transaction in the Date column of the general ledger account. 2. In the Posting Reference column of the general ledger account, record the journal letter (P for purchases journal) and page number. 3. In the Debit column of the general ledger account, enter the amount recorded in the General Debit column of the purchases journal. 4. Compute and record the new balance in the Debit Balance column. 5. Return to the purchases journal and place the general ledger account number in the General Posting Reference column (following the General Account Debited column).

AS YOU

READ

Key Point

Totaling, Proving, and Ruling the Purchases Journal To complete the purchases journal, refer to Figure 17– 4 on page 486 and follow these steps: 1. Draw a single rule across the three amount columns: Accounts Payable Credit, Purchases Debit, and General Debit. 2. Foot each amount column.

Ruling the Purchases Journal When ruling the purchases journal, the ruling is drawn across the amount columns only.

Section 1 The Purchases Journal

480-515_CH17_868829.indd 485

485

9/16/05 11:43:13 AM

PURCHASES JOURNAL INVOICE NO.

DATE 1 2

POST. REF.

CREDITOR’S ACCOUNT CREDITED

20-Dec. 8 CS56 Computer Solutions

GENERAL PURCHASES DEBIT

ACCOUNT DEBITED

POST. REF.

DEBIT 1

15 3417 Champion Store Supply

7

ACCOUNTS PAYABLE CREDIT

12

PAGE

✓

8 0 0 00

✓

1 2 0 0 00

8 0 0 00

2

Store Equipment

150

1 2 0 0 00

5

8

7 8

2 ACCOUNT Store Equipment

1

DATE

20-Dec.

ACCOUNT NO. 150 BALANCE

POST. REF.

DESCRIPTION

1 Balance 15

DEBIT

✓ P12

CREDIT

DEBIT

CREDIT

3

4 0 0 0 00 5 2 0 0 00 4

1 2 0 0 00

Figure 17–3 Posting from the Purchases Journal to the General Ledger 3. Test for the equality of debits and credits.

AS YOU

READ

In Your Own Words Proving the Purchases Journal What does “proving the purchases journal” mean?

Debit Columns

Credit Column

Purchases $15,400 General 1,450 $16,850

Accounts Payable $16,850 $16,850

4. In the Date column, on the line below the single rule, enter the date the journal is being totaled. 5. On the same line, write the word Totals in the Creditor’s Account Credited column. 6. Enter the three column totals, in ink, just below the footings. 7. Draw a double rule across the three amount columns. PURCHASES JOURNAL

DATE

INVOICE NO.

CS56 4692 SN63 2560 7894 3417 9881 8560 6593 5200

12

20-Dec. 8 10 12 14 14 15 15 18 20 27 31

13

4

1 2 3 4 5 6 7 8 9 10 11

CREDITOR’S ACCOUNT CREDITED

POST. REF.

ACCOUNTS PAYABLE CREDIT

PAGE

12

GENERAL PURCHASES DEBIT

ACCOUNT DEBITED

POST. REF.

DEBIT 1

Computer Solutions Sports Link Footwear Sports Nutrition Supply FastLane Athletics Pro Runner Warehouse Champion Store Supply Geary Office Supply FastLane Athletics Computer Solutions Sports Link Footwear Totals

5

2 6

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

4 3 2 1 2 1 1

8 0 0 00 0 0 0 00 6 0 0 00 0 0 0 00 3 0 0 00 2 0 0 00 2 5 0 00 0 0 0 00 2 0 0 00 5 0 000

16 8 5 0 00

8 0 0 00 4 0 0 0 00 6 0 0 00 3 0 0 0 00 2 3 0 0 00

2 3 4 5 6

Store Equipment Supplies 2 0 0 0 00 1 2 0 0 00 1 5 0 0 00

1 2 0 0 00 2 5 0 00

7 8 9 10

1

15 4 0 0 00

16 8 5 0 00 15 4 0 0 00

150 130

1 4 5 0 00

7

1 4 5 0 00

11 12 13

2 6

Figure 17–4 The Completed Purchases Journal 486

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 486

4/6/06 6:18:57 PM

The completed purchases journal is a quick reference tool for the accountant to review current transactions that affect the Purchases account and the Accounts Payable account. Miscellaneous purchases are also reflected in the purchases journal. If a general journal had been used, these transactions would have been mixed with other transactions (cash receipts, payments, and more) of the period. What else can the accountant verify from the completed purchases journal? A quick review of the Post. Ref. column tells the accountant that amounts have been posted to the accounts payable subsidiary ledger.

Posting the Special Column Totals to the General Ledger After totaling and ruling the purchases journal, the clerk posts the totals of the Accounts Payable Credit column and the Purchases Debit column to the general ledger accounts. Then the clerk calculates the new balance for each account, and enters the new balance in the appropriate Balance column. Figure 17–5 shows the posting of these column totals. After posting each column total, write the general ledger account number, in parentheses, in the column below the double rule as shown in Figure 17–5. The total of the General Debit column is not posted because the individual amounts were posted during the month. Place a check mark (✓) in parentheses below the double rule in the General Debit column to indicate that the total is not posted. PURCHASES JOURNAL DATE 1 2

INVOICE NO.

CREDITOR’S ACCOUNT CREDITED

POST. REF.

20-Dec. 8 CS56 Computer Solutions

11 12

PAGE

12

GENERAL

ACCOUNTS PAYABLE CREDIT

PURCHASES DEBIT

POST. REF.

ACCOUNT DEBITED

DEBIT 1

✓

27 5200 Sports Link Footwear 31 Totals

✓

8 0 0 00 1 5 0 0 00

16 8 5 0 00

16 8 5 0 00 ( 201)

13

8 0 0 00

2

1 5 0 0 00

15 4 0 0 00

1 4 5 0 00

15 4 0 0 00 ( 501)

1 4 5 000 (✓)

14

13 14

ACCOUNT Accounts Payable DATE

20-Dec.

DESCRIPTION

1 Balance 16 31

ACCOUNT NO. 201 BALANCE

POST. REF.

DEBIT

✓ G21 P12

2 0 0 00

CREDIT

DEBIT

DATE

Figure 17–5 Posting Column Totals from the Purchases Journal to the General Ledger

20-Dec.

DESCRIPTION

1 Balance 19 31

CREDIT

6 3 0 0 00 6 1 0 0 00 22 9 5 0 00

16 8 5 0 00

ACCOUNT Purchases

ACCOUNT NO. 501 BALANCE

POST. REF.

DEBIT

✓ CP14 P12

1 3 0 0 00 15 4 0 0 00

CREDIT

DEBIT

CREDIT

190 0 0 0 00 191 3 0 0 00 206 7 0 0 00

Section 1 The Purchases Journal

480-515_CH17_868829.indd 487

11 12

487

9/16/05 11:43:16 AM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table similar to this one to describe how these three separate transactions would appear in the purchases journal.

4RANSACTION

!CCOUNT $EBITED

!CCOUNT #REDITED

!MOUNT#OLUMN $EBITED

!MOUNT#OLUMN #REDITED

0URCHASED -ERCHANDISE ON!CCOUNT 0URCHASED3TORE %QUIPMENTON !CCOUNT

0URCHASED 3UPPLIESON !CCOUNT

Do the Math Dynamo Industries received an invoice from Santos Suppliers for merchandise purchased on July 5 for $12,000 with terms of 3/15, n/30. Answer the following questions: 1. What is the due date of the invoice? 2. What is the amount of cash discount? 3. What is the net amount to be paid? 4. What account is debited and for what amount? 5. What account is credited and for what amount?

Problem 17–1 Recording Transactions in the Purchases Journal The Design Den, a retail merchandising business, uses special journals. On page 3 of the purchases journal in the working papers, record the following purchases: Date

Feb.

488

Transactions

1

Purchased $1,400 in merchandise on account from Woodstock Furnishings, terms 3/15, n/30, Invoice WF39. 2 Bought $900 in store equipment on account from Holmes Equipment Company, terms n/30, Invoice 98. 4 Purchased $700 in merchandise from Fuller Fabrics, terms 3/10, n/30, Invoice 72. 7 Purchased computer speakers on account for $50 from Digital Solutions, terms 2/10, n/30, Invoice AB220. 10 Purchased fabric from Valley Upholstery for $1,500, terms 2/10, n/30, Invoice 947.

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 488

9/16/05 11:43:17 AM

SECTION 2

The Cash Payments Journal

You have learned about three special journals: the sales journal, the cash receipts journal, and the purchases journal. Now you will study the cash payments journal. For many businesses like grocers who must pay for the purchases of a wide variety of merchandise, frequent payments make the use of the cash payments journal necessary.

Using the Cash Payments Journal How Do You Record Cash Payments? The cash payments journal is used to record all transactions in which cash is paid out or decreased. These transactions include: payments to creditors for items bought on account, cash purchases of merchandise and other assets, payments for various expenses, payments for wages and salaries, and cash decreases for bank service charges and bankcard fees. The source documents for the journal entries are check stubs and the bank statement. The cash payments journal is also called the cash disbursements journal. Figure 17–6 shows the cash payments journal that On Your Mark uses. Notice that it has five amount columns. The seven transactions that follow are typical of those recorded in the cash payments journal. Note that each transaction in the cash payments journal results in a credit to the Cash in Bank account.

BEFORE YOU

Main Idea

The cash payments journal is used to record the cash a business pays out.

Read to Learn… ➤ how to record cash

payment transactions. (p. 489) ➤ how to post from the cash payments journal. (p. 494)

Key Terms

cash payments journal schedule of accounts payable proving cash

CASH PAYMENTS JOURNAL DATE

DOC NO.

ACCOUNT NAME

POST. REF.

GENERAL DEBIT

CREDIT

READ

PAGE ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT

1

1

2

2

3

3

Used to enter debits and credits to general ledger accounts for which there are no special columns. Used to record decreases to accounts in the accounts payable subsidiary ledger and to the Accounts Payable controlling account. Used to enter the amount of purchases discounts taken.

Every transaction recorded here decreases Cash in Bank.

Figure 17–6 Cash Payments Journal

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 489

489

9/16/05 11:43:21 AM

Recording the Cash Purchase of an Asset Cash purchases of various assets are recorded in the cash payments journal. One asset commonly purchased for cash is insurance. Let’s record a transaction involving a cash purchase of insurance.

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

1001

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

On December 17 On Your Mark paid $1,500 to Keystone Insurance Company for the premium on a six-month insurance policy, Check 1001.

Keystone Insurance Company

$ 1,500.00 DOLLARS

Security National Bank DALLAS, TEXAS

Michael Brown


421022523
727596 1001

CASH PAYMENTS JOURNAL DATE 1 2

DOC NO.

POST. REF.

ACCOUNT NAME

20-Dec. 17 1001 Prepaid Insurance

1

3

2

AS YOU

GENERAL CREDIT

DEBIT

14

PAGE ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT 1

3

1 5 0 0 00

1 5 0 0 00

2

4

5

3

Refer to the cash payments journal above and follow these steps:

READ

1. 2. 3. 4.

Enter the date of the transaction in the Date column. Enter the check number in the Document Number column. Enter the name of the account debited in the Account Name column. Because there is no special column for Prepaid Insurance, enter the amount of the debit in the General Debit column. 5. Enter the amount of the credit in the Cash in Bank Credit column.

Compare and Contrast Purchases and Cash Payments Journals How are the purchases journal and the cash payments journal similar? How are they different?

20 --

One thousand five hundred and no/100

MEMO

JOURNAL ENTRY

Dec. 17

DATE PAY TO THE ORDER OF

After payment, the invoice for the insurance is filed.

Recording a Cash Purchase of Merchandise Retail businesses are constantly purchasing merchandise for resale. While they make most purchases on account, many are for cash. Let’s record a cash purchase of merchandise for resale.

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

1002

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

Dec. 19

DATE

On December 19 On Your Mark purchased merchandise from FastLane Athletics for $1,300, Check 1002.

PAY TO THE ORDER OF

FastLane Athletics

20 -$ 1,300.00

One thousand three hundred and no/100

DOLLARS

Security National Bank DALLAS, TEXAS

JOURNAL ENTRY

Michael Brown

MEMO


421022523
727596 1002

CASH PAYMENTS JOURNAL DATE

3 4

490

1

DOC NO.

19 1002 Purchases

2

ACCOUNT NAME

3

POST. REF.

GENERAL DEBIT

CREDIT

14

PAGE ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT

1 3 0 0 00

1 3 0 0 00

3

4

5

4

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 490

9/16/05 11:43:25 AM

Refer to On Your Mark’s purchase from FastLane Athletics and the cash payments journal as you follow these steps:

AS YOU

1. Enter the date of the transaction in the Date column. 2. Enter the check number in the Document Number column. 3. Enter the name of the account debited in the Account Name column. 4. Because there is no special column for Purchases, enter the amount of the debit in the General Debit column. 5. Enter the amount of the check in the Cash in Bank Credit column.

READ

Key Point The General Column The General column of a special journal refers to the general ledger. The account named in the Account Name column is the general ledger account affected by the transaction.

After recording the transaction, the receipt for the cash purchase is filed.

Recording a Payment on Account Now let’s learn how to make a payment on account and take a purchase discount.

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

1003

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

DATE

On December 24 On Your Mark paid $2,254 to Pro Runner Warehouse for merchandise purchased on account, $2,300 less a discount of $46, Check 1003.

PAY TO THE ORDER OF

Dec. 24

Pro Runner Warehouse

$ 2,254.00

Two thousand two hundred fifty-four and no/100 DALLAS, TEXAS

Michael Brown


421022523
727596 1003

JOURNAL ENTRY

CASH PAYMENTS JOURNAL

4

1

5

DOC NO.

ACCOUNT NAME

POST. REF.

GENERAL DEBIT

CREDIT

14

PAGE ACCOUNTS PAYABLE DEBIT

2 3 0 0 00

24 1003 Pro Runner Warehouse

2

DOLLARS

Security National Bank MEMO

DATE

20 --

3

4

PURCHASES DISCOUNTS CREDIT

4 6 00

5

CASH IN BANK CREDIT

2 2 5 4 00

6

4 5

Refer to the purchases journal above and follow these steps: 1. 2. 3. 4.

Enter the date of the transaction in the Date column. Enter the check number in the Document Number column. Enter the creditor’s name in the Account Name column. Enter the amount of the original purchase in the Accounts Payable Debit column. 5. Enter the amount of the purchase discount in the Purchases Discounts Credit column. 6. Enter the amount of the check in the Cash in Bank Credit column.

Remember that a processing stamp is placed on each invoice when it is verified. After the cash payment has been journalized, the accounting clerk records the check number on the “Check No.” line of the processing stamp. The paid invoice is then filed. Companies offer no discount for some purchases. For others they offer a discount, but the business cannot pay within the discount period. In these cases the check is written for the full amount of the purchase.

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 491

491

9/16/05 11:43:27 AM

Recording Other Cash Payments Let’s record a check written to pay for shipping charges when merchandise is sent FOB shipping point.

B u s i n e s s Tr a n s a c t i o n

ON YOUR MARK

1004

ATHLETIC WEAR

22-523 4210

595 Leslie Street, Dallas, TX 75207

DATE

On December 24 On Your Mark issued Check 1004 for $275 to Dara’s Delivery Service for shipping charges on merchandise purchased from Sports Link Footwear.

PAY TO THE ORDER OF

Dec. 24

Dara’s Delivery Service

Two hundred seventy-five and no/100

DOLLARS

Security National Bank DALLAS, TEXAS

Michael Brown

MEMO


421022523
727596 1004

JOURNAL ENTRY

CASH PAYMENTS JOURNAL DATE

5 6

1

DOC NO.

ACCOUNT NAME

24 1004 Transportation In

2

20 -$ 275.00

3

POST. REF.

GENERAL DEBIT

CREDIT

14

PAGE ACCOUNTS PAYABLE DEBIT

2 7 5 00

4

PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT

2 7 5 00

5

5 6

Refer to the cash payments journal above and follow these steps: 1. Enter the date of the transaction in the Date column. 2. Enter the check number in the Document Number column. 3. Enter the name of the account debited in the Account Name column. 4. Because there is no special column for Transportation In, enter the amount in the General Debit column. 5. Enter the amount of the check in the Cash in Bank Credit column.

Recording Payment of Payroll

Connect to…

MATHEMATICS A 1946 contest was held to determine whether a modern electric adding machine or an ancient abacus could calculate problems faster. The abacus won all rounds except multiplication.

492

In an earlier chapter, you learned how to record the payroll entry in the general journal. When a business uses special journals, the entry for payment of the payroll is recorded in the cash payments journal. The information to record payroll transactions in journals is taken from the payroll register. To record the payroll transaction, refer to the cash payments journal and follow these steps: 1. On the first line of the entry, enter the date of the transaction in the Date column. 2. Enter the check number in the Document Number column. 3. Enter the name of the account debited in the Account Name column. 4. Enter the amount of the payroll (gross pay) in the General Debit column. 5. Enter the net pay in the Cash in Bank Credit column. 6. On the next four lines, enter the names of the accounts credited in the Account Name column. Enter the amount of each liability in the General Credit column.

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 492

9/16/05 11:43:29 AM

B u s i n e s s Tr a n s a c t i o n On December 31 On Your Mark wrote Check 1012 for $2,974 to pay the payroll of $4,000 (gross earnings) for the pay period ended December 31. The following amounts were withheld: Employees’ Federal Income Tax, $640; Employees’ State Income Tax, $80; Social Security Tax, $248; and Medicare Tax, $58. JOURNAL ENTRY CASH PAYMENTS JOURNAL DATE

DOC NO.

POST. REF.

ACCOUNT NAME

31 1012 Salaries Expense 3 2 Employees’ Fed. Inc. Tax Pay. 1 Employees’ State Inc. Tax Pay. Social Security Tax Pay. Medicare Tax Pay.

13 14 15 16 17

GENERAL CREDIT

DEBIT

14

PAGE ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT

5 2 9 7 4 00

4 0 0 0 00

4

6 4 0 00 8 0 00 2 4 8 00 5 8 00

6

13 14 15 16 17

18

18

Recording Bank Service Charges Bank service charges are automatically deducted from the checking account. Although no check is written to pay these charges, the transactions are recorded in the cash payments journal because the charges decrease the Cash in Bank account.

B u s i n e s s Tr a n s a c t i o n On December 31 On Your Mark recorded a bank service charge for $20 indicated on the bank statement. JOURNAL ENTRY CASH PAYMENTS JOURNAL DATE

18

31

DOC NO.

ACCOUNT NAME

Miscellaneous Expense

POST. REF.

GENERAL DEBIT

CREDIT

14

PAGE ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

2 0 00

CASH IN BANK CREDIT

2 0 00

19

19

Recording Bankcard Fees Most banks charge a fee for handling bankcard sales. This fee is automatically deducted from the business’s checking account. For example, On Your Mark’s bank deducted a bankcard fee of $75. The fee appeared on the bank statement as a deduction from the checking account balance. The accounting clerk recorded this decrease in cash in the cash payments journal.

AS YOU

READ

In Your Experience Bank Service Charges What bank service charges, if any, has your bank charged you?

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 493

18

493

9/16/05 11:43:41 AM

B u s i n e s s Tr a n s a c t i o n On December 31 On Your Mark recorded the bankcard fee of $75 that appeared on the bank statement. JOURNAL ENTRY CASH PAYMENTS JOURNAL DOC NO.

DATE

19

31

ACCOUNT NAME

Bankcard Fees Expense

POST. REF.

GENERAL DEBIT

CREDIT

PAGE ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

14

CASH IN BANK CREDIT

7 5 00

20

7 5 00

19 20

The clerk also enters the bank charges in the checkbook records. Figure 17–7 illustrates one way to adjust the balance on the check stub. The deposit heading is crossed out, and the words Bankcard Fees are written in its place. A deduction of $75 is entered on the stub. On the next line, the words Less Bank Service Charge are written and an entry is made for the $20 deduction. Both amounts are subtracted from the balance brought forward.

AS YOU

READ

Key Point Posting from the Cash Payments Journal Every day accounting clerks post individual amounts in the Accounts Payable Debit column to the accounts payable subsidiary ledger.

494

Posting from the Cash Payments Journal How Do You Post from the Cash Payments Journal? Individual amounts in the Accounts Payable Debit column and the General Debit column are posted daily. Column totals are posted at the end of the month. To keep creditors’ accounts current, clerks make daily postings from the Accounts Payable Debit column to the accounts payable subsidiary ledger. Refer to Figure 17–8 and follow these steps: 1. Enter the date of the transaction in the Date column of the subsidiary ledger account. 2. In the subsidiary ledger account’s Posting Reference column, enter the journal letters (CP for the No. 1013 $ cash payments journal) and 20 Date the page number. To 3. In the Debit column of the For subsidiary ledger account, Dollars Cents enter the amount recorded in 15,274 00 Balance brought forward the Accounts Payable Debit Bankcard
75 00 Add deposits Fees column of the journal.
20 00 Less Bank Svc. Chg. 4. Compute the new account 15,179 00 Total balance and enter it in the Less this check Balance column. If the Balance carried forward account has a zero balance, draw a line through the Figure 17–7 Recording Bankcard Fees Balance column. and Service Charges in the Checkbook

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 494

9/16/05 11:43:43 AM

CASH PAYMENTS JOURNAL DOC NO.

ACCOUNT NAME

POST. REF.

20-Dec. 17 1001 Prepaid Insurance 19 1002 Purchases 24 1003 Pro Runner Warehouse

135 501 ✓

DATE 1 2 3 4 5

PAGE ACCOUNTS PAYABLE DEBIT

GENERAL CREDIT

DEBIT

2 3 0 0 00

5

20-Dec.

4 6 00

1 5 0 0 00 1 3 0 0 00 2 2 5 4 00

2 3 4 5

POST. REF.

DESCRIPTION

14 24

2

3

Pro Runner Warehouse ADDRESS 22009 Ben White Blvd., Austin, TX 78705 DATE

CASH IN BANK CREDIT 1

1 5 0 0 00 1 3 0 0 00

NAME

1

PURCHASES DISCOUNTS CREDIT

14

DEBIT

P12 CP14

CREDIT

BALANCE

2 3 0 0 00

2 3 0 0 00

2 3 0 0 00

4

Figure 17–8 Posting from the Cash Payments Journal to the Accounts Payable Subsidiary Ledger

5. Return to the cash payments journal and enter a check mark (✓) in the Posting Reference column. Figure 17–9 shows On Your Mark’s accounts payable subsidiary ledger after all postings have been made. Notice that the accounts contain entries from the purchases, cash payments, and general journals.

…>“«ˆœ˜Ê-̜ÀiÊ-Õ««Þ !$$2%33 ™™{xxÊ7ˆˆ>“ÃÊ>˜iʛÎÎ{]Ê >>Ã]Ê/8ÊÇxÓ£{ .!-%

$!4%

Ó䇇 iV°

$%3#2)04)/.

£ >>˜Vi £x ÓÈ

0/34 2%&

a *£Ó

*£{

$%")4

#2%$)4

£ Ó ä ä ää £ Ó ä ä ää

"!,!.#%

£ ä ä ä ää Ó Ó ä ä ää £ ä ä ä ää

œ“«ÕÌiÀÊ-œṎœ˜Ã !$$2%33 ș™äÊ >ŽiÀÊ ˆÀVi]Ê >>Ã]Ê/8ÊÇxÓ£™ .!-%

$!4%

Ó䇇 iV°

$%3#2)04)/.

£ >>˜Vi n Óä Σ

0/34 2%&

a *£Ó *£Ó

*£{

$%")4

#2%$)4

n ä ä ää £ Ó ä ä ää £ Ó ä ä ää

"!,!.#%

xää £ Îää Ó xää £ Îää

ää ää ää ää

Figure 17–9 The Completed Accounts Payable Subsidiary Ledger

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 495

495

9/16/05 11:43:44 AM

Dara’s Delivery Service 14500 Ellis Blvd., Plano, TX 75093

NAME

ADDRESS DATE

20-Dec.

DESCRIPTION

1 Balance 30

POST. REF.

DEBIT

✓ CP14

3 0 0 00

CREDIT

BALANCE

3 0 0 00

FastLane Athletics 35992 Fletcher Blvd. #334, Boston, MA 02106

NAME

ADDRESS DATE

20-Dec.

POST. REF.

DESCRIPTION

1 Balance 14 16 18 28

DEBIT

✓ P12 G21 P12 CP14

CREDIT

BALANCE

1 4 3 5 3

3 0 0 0 00 2 0 0 00 2 0 0 0 00 2 0 0 0 00

000 000 800 800 800

00 00 00 00 00

Geary Office Supply ADDRESS 3300 Fulton Street, Dallas, TX 75219 NAME

DATE

20-Dec.

POST. REF.

DESCRIPTION

15

DEBIT

CREDIT

P12

BALANCE

2 5 0 00

2 5 0 00

Pro Runner Warehouse ADDRESS 22009 Ben White Blvd., Austin, TX 78705 NAME

DATE

20-Dec.

DESCRIPTION

14 24

POST. REF.

DEBIT

P12 CP14

CREDIT

BALANCE

2 3 0 0 00

2 3 0 0 00

2 3 0 0 00

Sports Link Footwear ADDRESS 300 Page St. #910, San Francisco, CA 94107 NAME

DATE

20-Dec.

DESCRIPTION

1 Balance 10 27 31

POST. REF.

✓ P12 P12 CP14

DEBIT

CREDIT

4 0 0 0 00 1 5 0 0 00 1 5 0 0 00

BALANCE

2 6 7 6

0 0 5 0

0 0 0 0

0 0 0 0

00 00 00 00

Sports Nutrition Supply ADDRESS 348 11th Street, Cleveland, OH 44112 NAME

DATE

20-Dec.

DESCRIPTION

1 Balance 12 27

POST. REF.

✓ P12 CP14

DEBIT

CREDIT

6 0 0 00 6 0 0 00

BALANCE

1 5 0 0 00 2 1 0 0 00 1 5 0 0 00

Figure 17–9 The Completed Accounts Payable Subsidiary Ledger (continued)

496

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 496

9/16/05 11:43:47 AM

CASH PAYMENTS JOURNAL DATE 1 2

DOC NO.

POST. REF.

ACCOUNT NAME

20-Dec. 17 1001 Prepaid Insurance

GENERAL

20-Dec.

DESCRIPTION

17

ACCOUNTS PAYABLE CREDIT

PURCHASES DISCOUNTS CREDIT

5

1 5 0 0 00

CASH IN BANK CREDIT

1 5 0 0 00

3 POST. REF.

CP14

2 3

ACCOUNT Prepaid Insurance DATE

CREDIT

DEBIT

14

1

135

3

1

PAGE

ACCOUNT NO. 135

2

BALANCE DEBIT

CREDIT

DEBIT

CREDIT

1 5 0 0 00 4

1 5 0 0 00

Figure 17–10 Posting from the General Debit Column of the Cash Payments Journal

Posting from the General Debit Column Accountants post daily from the General Debit column to the appropriate general ledger accounts. Refer to Figure 17–10 as you read the following steps. 1. Enter the date of the transaction in the Date column of the general ledger account. 2. Enter the journal letters (CP for the cash payments journal) and the page number in the Posting Reference column of the general ledger account. 3. In the Debit column, enter the amount from the General Debit column of the cash payments journal. 4. Compute the new balance and enter it in the appropriate Balance column. (Because the example used here has no previous balance, the amount recorded in the Debit column is also entered in the Debit Balance column.) 5. Return to the cash payments journal and enter the account number in the Posting Reference column.

AS YOU

READ

Instant Recall Totaling Special Journal Columns First, foot columns with the totals entered in pencil. After verifying the totals, write them in ink.

All the transactions in the General Debit column are posted to the general ledger accounts in the same way. Accountants also post entries daily from the General Credit column to the appropriate general ledger accounts. This is done in the same way as shown for General Debit Column entries.

Totaling, Proving, and Ruling the Cash Payments Journal Accountants total the cash payments journal following the same steps that they use for other special journals. Before they rule the journal, they prove the equality of debits and credits.

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 497

497

9/16/05 11:43:50 AM

CASH PAYMENTS JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13

DATE

DOC NO.

20-Dec. 17 19 24 24 26 27 28 30 31 31 31 31

1001 1002 1003 1004 1005 1006 1007 1008 1009 1010 1011 1012

15 16 17

19 20

POST. REF.

GENERAL DEBIT

CREDIT

ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT 1

14

18

ACCOUNT NAME

14

PAGE

31 — 31 — 31

Prepaid Insurance Purchases Pro Runner Warehouse Transportation In Champion Store Supply Sports Nutrition Supply FastLane Athletics Dara’s Delivery Service Rent Expense Computer Solutions Sports Link Footwear Salaries Expense Employee’s Federal Inc. Tax Pay. Employee’s State Inc. Tax Pay. Social Security Tax Payable Medicare Tax Payable Miscellaneous Expense Bankcard Fees Expense Totals

135 501 ✓ 505 ✓ ✓ ✓ ✓ 660 ✓ ✓ 665 205 211 212 213 655 605

1 5 0 0 00 1 3 0 0 00 2 3 0 0 00

4 6 00

2 7 5 00 1 2 0 0 00 6 0 0 00 2 0 0 0 00 3 0 0 00

4 0 00

2 0 0 0 00 1 2 0 0 00 1 5 0 0 00

2 4 00 3 0 00

4 0 0 0 00

1 5 0 0 00 1 3 0 0 00 2 2 5 4 00 2 7 5 00 1 2 0 0 00 6 0 0 00 1 9 6 0 00 3 0 0 00 2 0 0 0 00 1 1 7 6 00 1 4 7 0 00 2 9 7 4 00

6 4 0 00 8 0 00 2 4 8 00 5 8 00 2 0 00 7 500

9 1 7 0 00

9 1 7 0 00

1 0 2 6 00

1 0 2 6 00

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

9 1 0 0 00

9 1 0 0 00

1 4 0 00

2 0 00 7 5 00

17 1 0 4 00

1 4 0 00 17 1 0 4 00

21

18 19 20 21

Figure 17–11 The Completed Cash Payments Journal

Debit Columns General $ 9,170 Accounts Payable 9,100 $18,270

Credit Columns General $ 1,026 Purchases Discounts 140 Cash in Bank 17,104 $18,270

Since debits equal credits, the cash payments journal can be doubleruled, as shown in Figure 17–11.

Posting Column Totals to the General Ledger At the end of the month, the accountant posts the total of each special amount column to the general ledger account named in the column heading. For the cash payments journal, column totals are posted to Accounts Payable, Purchases Discounts, and Cash in Bank. Figure 17–12 shows the posting of the three special column totals to the general ledger accounts. Note that the account numbers for the three general ledger accounts are written in parentheses below the double rule in the appropriate columns of the cash payments journal. The totals of the General Debit and Credit columns are not posted. Each entry in those columns was posted individually to the general ledger accounts. A check mark (✓) is entered below the double rule in the General Debit and Credit columns. 498

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 498

9/16/05 11:43:51 AM

CASH PAYMENTS JOURNAL DATE 1 2

DOC NO.

20-Dec. 17 1001 Prepaid Insurance

19 20

31 — 31

ACCOUNTS PAYABLE DEBIT

GENERAL

POST. REF.

ACCOUNT NAME

CREDIT

DEBIT

14

PAGE PURCHASES DISCOUNTS CREDIT

CASH IN BANK CREDIT 1

1 5 0 0 00

135

Bankcard Fees Expense Totals

7 5 00

605

9 1 7 0 00

1 0 2 6 00

9 1 7 0 00 (✓)

21

1 0 2 6 00 (✓)

9 1 0 0 00

9 1 0 0 00 ( 201)

1 4 0 00

1 5 0 0 00

2

7 5 00

19

17 1 0 4 00

1 4 0 00 ( 510)

17 1 0 4 00 ( 101)

22

20 21 22

ACCOUNT Cash in Bank DATE

20-Dec.

DESCRIPTION

1 Balance 31 31

ACCOUNT NO. 101 BALANCE

POST. REF.

DEBIT

✓ CR13 CP14

17 2 8 3 00

CREDIT

DEBIT

17 1 0 4 00

CREDIT

15 0 0 0 00 32 2 8 3 00 15 1 7 9 00

ACCOUNT Accounts Payable DATE

20-Dec.

DESCRIPTION

1 Balance 16 31 31

ACCOUNT NO. 201 POST. REF.

✓ G21 P12 CP14

BALANCE DEBIT

CREDIT

DEBIT

20-Dec.

DESCRIPTION

1 Balance 31

6 6 22 13

2 0 0 00 16 8 5 0 00 9 1 0 0 00

ACCOUNT Purchases Discounts DATE

CREDIT

3 1 9 8

0 0 5 5

0 0 0 0

00 00 00 00

ACCOUNT NO. 510 POST. REF.

BALANCE DEBIT

✓ CP14

CREDIT

1 4 0 00

DEBIT

CREDIT

1 2 0 0 00 1 3 4 0 00

Figure 17–12 Posting Column Totals from the Cash Payments Journal

Proving the Accounts Payable Subsidiary Ledger The accountant prepares a schedule of accounts payable after posting the column totals. This schedule lists all creditors in the accounts payable subsidiary ledger, the balance in each account, and the total amount owed to all creditors. The clerk proves the accounts payable subsidiary ledger when the total of the schedule of accounts payable agrees with the balance of the Accounts Payable (controlling) account in the general ledger. Figure 17–13 on page 500 shows On Your Mark’s schedule of accounts payable for December. The accounts are listed in alphabetical order. All creditors are listed, even those with zero balances. Notice that the total listed on the schedule ($13,850) agrees with the balance of the Accounts Payable (controlling) account.

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 499

499

9/16/05 11:43:58 AM

ACCOUNT Accounts Payable DATE

20-Dec.

DESCRIPTION

1 Balance 16 31 31

ACCOUNT NO. 201 POST. REF.

✓ G21 P12 CP14

BALANCE DEBIT

CREDIT

DEBIT

CREDIT

6 6 22 13

2 0 0 00 16 8 5 0 00 9 1 0 0 00

300 100 950 850

00 00 00 00

On Your Mark Athletic Wear Schedule of Accounts Payable December 31, 20-1 0 0 0 00 1 3 0 0 00

Champion Store Supply Computer Solutions Dara’s Delivery Service FastLane Athletics Geary Office Supply Pro Runner Warehouse Sports Link Footwear Sports Nutrition Supply Total Accounts Payable

The balance of the Accounts Payable account should equal the total of the schedule of accounts payable.

3 8 0 0 00 2 5 0 00 6 0 0 0 00 1 5 0 0 00 13 8 5 0 00

Figure 17–13 Schedule of Accounts Payable

Proving Cash Proving cash is the process of verifying that cash recorded in the accounting records agrees with the amount entered in the checkbook. Ideally businesses should prove cash each day. When a business uses special journals, however, it updates the Cash in Bank account in the general ledger at the end of the month. For many businesses, then, proving cash is done at the end of the month.

500

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 500

9/16/05 11:43:58 AM

The cash proof may be prepared on plain paper, on accounting stationery, on a special cash proof form, or on a computer. The cash proof for On Your Mark, shown in Figure 17–14, is prepared on two-column accounting stationery. To prove cash, follow these steps: 1. On the first line, record the beginning balance of Cash in Bank according to the general ledger account. 2. On the next line, enter the total cash received during the month. This is the total of the Cash in Bank Debit column from the cash receipts journal. 3. Add the first and second lines. 4. From this subtotal subtract the cash payments for the month. This is the total of the Cash in Bank Credit column from the cash payments journal. 5. Compare this figure to the balance shown on the last check stub in the checkbook. If the ending balance of Cash in Bank and the balance on the check stub match, you have proved cash. In this example the ending balance of Cash in Bank is $15,179. The balance shown on the last check stub is also $15,179; therefore, cash is proved. If the balances are not equal, you should look for errors. Recording a bank service charge or a bankcard fee in the checkbook but not in the general ledger can cause the cash proof to be out of balance. Next, you should verify that all disbursements and deposits were recorded in the accounting records. If cash is being proved at month-end, the accountant can then continue making month-end entries. On Your Mark Athletic Wear Cash Proof December 31, 20-Beginning Cash in Bank Balance Plus: Cash Receipts for the Month Subtotal Less: Cash Payments for the Month Ending Cash in Bank Balance

15 17 32 17 15

000 283 283 104 179

00 00 00 00 00

Check Stub Balance

15 1 7 9 00

Figure 17–14 Cash Proof Note that proving cash is different from reconciling a bank statement, which is taught in Chapter 11 (pages 284–287). Proving cash verifies that amounts recorded in the general ledger, cash receipts journal, and cash payments journal agree with the checking account balance. It does not confirm that the bank has processed all the deposits from the business or that all outstanding checks have cleared.

Section 2 The Cash Payments Journal

480-515_CH17_868829.indd 501

501

4/6/06 6:19:14 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table similar to the one here to identify the journal in which each of the following transactions should be recorded. Identify debit and credit parts for each transaction.

4RANSACTION 3OLDMERCHANDISEONACCOUNT

*OURNAL

!CCOUNTS $EBITED

!CCOUNTS #REDITED

0URCHASEDMERCHANDISEONACCOUNT 0AIDACREDITOR 3OLDMERCHANDISEFORCASH "ANKCARDSALES 0AIDTHEPAYROLL $ISCOVEREDTHATPURCHASEOFSUPPLIES WASINCORRECTLYDEBITEDTO0URCHASES

Do the Math At Car Wash Palace, hourly wage earners are paid weekly. These employees earned $8,000 in total gross earnings this week. 1. Calculate each withholding amount. 2. What is the total net pay for this week? Tax Rate Social Security 6.2% Medicare 1.45% Federal Unemployment 0.8% State Unemployment 5.4% State Income 4.0%

Problem 17–2 Preparing a Cash Proof Apple Tree Boutique uses special journals. On September 30 the total of the Cash in Bank Debit column of the cash receipts journal is $18,750.12. The total of the Cash in Bank Credit column of the cash payments journal is $16,890.43. The checkbook balance on September 30 is $5,610.59.

Instructions Prepare a cash proof for September in your working papers. The balance of Cash in Bank on September 1 is $3,750.90. $

Problem 17–3 Analyzing a Source Document The Country Peddler, which is a retail merchandising business, had the following transaction that occurred on November 2.

Date To For

873.00 No. 104 November 2 20 -Colonial Products Inc. Inv. 323 $900 less 3% disc. $27.00 Dollars

Balance brought forward

Cents

3,468 29

Add deposits

Instructions Analyze Check Stub 104 that is shown here. In your working papers, make the necessary entry to record the transaction on page 11 of the cash payments journal. 502

Total Less this check Balance carried forward

3,468 29 873 00 2,595 29

Chapter 17 Special Journals: Purchases and Cash Payments

480-515_CH17_868829.indd 502

9/16/05 11:44:05 AM

Accounting Careers in Focus DIRECTOR OF FINANCE

Leslie Karnauskas Cobe Cardiovascular, Arvada, Colorado Q: What does Cobe Cardiovascular do? A: We identify and develop products that help treat cardiovascular disease.

Q: What are your day-to-day responsibilities? A: I manage the general ledger, financial reporting, accounts payable, and cost accounting groups at three of our company’s sites. I am part of a team responsible for budgeting and forecasting, internal and external audit, and financial analysis.

Q: What has been key to your success? A: I have always set high standards for myself and those I manage.

.. Tips from . ing your Before submitt forget to résumé, don’t eread the proofread it. R ral times and document seve do the same. ask a friend to al or grammatic A single typo g use a hirin mistake can ca uestion your manager to q n m and attentio professionalis to detail.

I continually look for new and better ways to get things done, not just in accounting but in all aspects of the business. I’ve also learned the importance of being proactive and taking initiative.

Q: What is most challenging about your job? A: Finding the time and resources to meet our company’s goals. I constantly reprioritize my tasks and manage several initiatives at once to make sure I meet all deadlines and still focus on growing the business.

Q: What advice do you have for accounting students? A: Learn as much as you can about the company you join—its products, market, and strategy. Involve yourself in every aspect of the business. Join a professional organization and volunteer on a committee or its board to build leadership skills. Also, pursue interests outside of work to balance your life.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Maintain budgeting and forecasting models; assist with businessfunding decisions; hire, train, and motivate finance staff. Training or Education Needed: At least 10 years of public accounting or finance experience. A master’s degree in business administration, as well as a CPA or CMA designation is preferred. Aptitudes, Abilities, and Skills: Strong leadership abilities, technology skills, analytical skills, and communication skills. Salary Range: $80,000 to $180,000 depending on location, experience, and company size. Career Path: Obtain the required degrees and certifications. Gain job experience by either working for a public accounting firm or in management accounting. Once in a corporate environment, gradually take on increased responsibility and move into a management position.

Thinking Critically

How can you improve your time-management skills and increase productivity? Chapter 17 Accounting Careers in Focus

480-515_CH17_868829.indd 503

503

9/16/05 11:44:07 AM

Summary

CH A P T ER 17 Key Concepts

1. A purchases journal is used to record purchases made on credit instead of with cash. The Purchases Debit column is used for merchandise purchases only. Other purchases are recorded in the General column. The cash payments journal is used to record all decreases to cash. 2. The following illustrates the purchases journal entry to record the purchase of merchandise on account. PURCHASES JOURNAL DATE 1

Date

2

INVOICE NO.

CREDITOR’S ACCOUNT CREDITED

POST. REF.

ACCOUNTS PAYABLE CREDIT

GENERAL PURCHASES DEBIT

x x xx

Invoice Creditor’s Name No.

12

PAGE

ACCOUNT DEBITED

POST. REF.

DEBIT

x x xx

1 2

3

3

The following types of transactions are recorded in the cash payments journal: (a) (b) (c) (d)

merchandise purchased for cash payment to a creditor payment to a creditor with a cash discount taken cash paid out but no check written (for example, a bank service charge) CASH PAYMENTS JOURNAL

DATE

(a) (b) (c) (d)

1 2 3 4

Date Date Date Date

DOC NO.

Ck # Ck # Ck # ---

ACCOUNT NAME

POST. REF.

Purchases Creditor’s Account Name Creditor’s Account Name Account Name to be Debited

GENERAL DEBIT

14

PAGE

CREDIT

ACCOUNTS PAYABLE DEBIT

PURCHASES DISCOUNTS CREDIT

x x xx x x xx x x xx

x x xx

x x xx

CASH IN BANK CREDIT

x x xx x x xx x x xx x x xx

5

1 2 3 4 5

3. Follow these steps to record payroll transactions in the cash payments journal: (a) Enter the date of the transaction in the Date column. (b) Enter the check number in the Document Number column. (c) Enter the name of the account debited in the Account Name column. (d) Enter the amount of the payroll (gross pay) in the General Debit column. (e) Enter the net pay amount in the Cash in Bank Credit column. (f) On the next four lines, enter the names of the accounts credited in the Account Name column, and enter the amount of each liability in the General Credit column. 4. Post these columns’ individual amounts daily:

504

Journal

Individual Column Amounts

Are Posted To:

Purchases Journal

Accounts Payable Credit column

➤ Subsidiary ledger creditor account

General Debit column

➤ General ledger account

Chapter 17 Summary

480-515_CH17_868829.indd 504

9/16/05 11:44:12 AM

Summary

CHAPT E R 1 7

Journal

Individual Column Amounts

Are Posted To:

Cash Payments Journal

Accounts Payable Debit column

➤ Subsidiary ledger creditor account

General Debit column

➤ General ledger account

General Credit column

➤ General ledger account

Post these column totals at month-end: Journal

Individual Column Amounts

Are Posted To:

Purchases Journal

Accounts Payable Credit column

➤ Accounts Payable account

Purchases Debit column

➤ Purchases account

Cash Payments Journal

Accounts Payable Debit column

➤ Accounts Payable account

Purchases Discounts Credit column

➤ Purchases Discounts account

Cash in Bank Credit column

➤ Cash in Bank account

5. Complete seven steps before you post special journal column totals to the general ledger: (a) Rule the amount columns. (b) Foot the amount columns. (c) Prove the journal. (d) Under the last transaction, enter the date the journal is totaled in the Date column. (e) On the same line, enter the word Totals • in the purchases journal Creditors’ Account Credited column • in the cash payments journal Account Name column (f) Enter the column totals, in ink, just below the footings. (g) Double-rule the amount columns. 6. To prove the accounts payable subsidiary ledger, accountants prepare a schedule of accounts payable, which is a list of each creditor, the balance in the creditor’s account, and the total amount due to all creditors. The Accounts Payable account is the controlling account for the accounts payable subsidiary ledger. Review this relationship in Figure 17–13 on page 500. 7. At the end of each month, prove cash by verifying that the cash recorded in the accounting records agrees with the amount shown in the checkbook.

Key Terms cash payments journal

(p. 489)

purchases journal

(p. 482)

proving cash

(p. 500)

schedule of accounts payable

(p. 499)

Chapter 17 Summary

480-515_CH17_868829.indd 505

505

9/16/05 11:44:17 AM

C H A P T ER 17 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

Purchases and Cash Payments Journals a. What are the source documents for the purchases journal? b. What are the source documents for the cash payments journal? Recording Transactions a. List the steps to record transactions in the purchases journal. b. Bank service charges are automatically deducted from the bank account. Why are these charges recorded in the cash payments journal? Recording Payroll Payments a. Where do you find the information for recording payroll transactions in the cash payments journal? b. In recording payroll, what four liabilities are entered in the General Credit column of the cash payments journal? Posting from Special Journals a. When are purchases transactions posted to the accounts payable subsidiary ledger? Why? b. When are cash payments transactions posted to the accounts payable subsidiary ledger? Why? Totaling, Proving, and Ruling a. When totaling, proving, and ruling the purchases journal, where are the double rules placed? b. What does the check mark (✓) in the first Posting Reference column indicate? Schedule of Accounts Payable a. What information does the schedule of accounts payable include? b. With what account in the general ledger must the total of the schedule of accounts payable agree when proving the accounts payable subsidiary ledger? Proving Cash a. When does a business that uses special journals update the Cash in Bank account in the general ledger? b. How does an accountant prove cash?

Apply Key Terms You are an applicant for an accounting clerk position with PETCO and asked to write definitions for these terms. Make sure you connect your knowledge of these accounting terms to the financial activities you believe take place at PETCO. cash payments journal proving cash purchases journal

506

schedule of accounts payable

Chapter 17 Review and Activities

480-515_CH17_868829.indd 506

9/16/05 11:44:19 AM

Computerized Accounting

CHAPT E R 1 7

Mastering Purchases and Cash Payments Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Setting up vendor records

• Ledger sheet or card is prepared with vendor details such as name, address, and contact information. • Account activities are posted to the vendor subsidiary ledger accounts.

• Record details of vendor accounts into vendor records. • The software will access this information automatically each time the vendor ID code is used.

Recording a debit memorandum

• A journal entry is prepared to record the debit memorandum. • The journal entry is posted to the subsidiary account and to the general ledger.

• The accounting software creates a credit memo and applies it to the appropriate outstanding vendor invoice. • The accounting software automatically posts the credit memo to the vendor account and to the general ledger.

Q&A Peachtree Question

Answer

How do I set up a new vendor account?

1. 2. 3. 4. 5.

From the Maintain menu, select Vendors. Assign a Vendor ID to the new vendor. Enter vendor name and contact information. Click on the Purchases Defaults tab. Verify or enter the appropriate purchase default GL account number.

How do I record a debit memorandum?

1. 2. 3. 4.

From the Tasks menu, select Vendor Credit Memos. Select the appropriate vendor from the Vendor ID drop-down list. Enter the Vendor Credit number in the Credit Number field. Click on the Apply to Invoices tab, select the invoice to which the credit memo is applied, and enter the credit amount.

QuickBooks Q & A QuickBooks Question

Answer

How do I set up a new vendor record?

1. 2. 3. 4.

From the Lists menu, select Vendor List. Click the Vendor pull-down menu and choose New. Enter vendor name and contact information. Click on the Additional Info tab and enter any additional vendor information.

How do I issue and record a debit memorandum?

1. 2. 3. 4.

From the Vendors menu, select Enter Bills. Click the Credit radio button and enter the vendor name. Click on the Items tab and select the item to which the credit memo is applied. Enter the quantity and select a customer from the Customer:Job field.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 17 Computerized Accounting

480-515_CH17_868829.indd 507

507

9/16/05 11:44:25 AM

Problems

C H A P T ER 17 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 17–4 1. Select the problem set for Denardo’s Country Store (Prob. 17–4). 2. Rename the company and set the system date. 3. Record the payment of the payroll using the Payments option. 4. Print a Cash Disbursements Journal report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

TIP: Remember to update the G/L Account field for each line of a multipart cash payment transaction.

SMART GUIDE Step–by–Step Instructions: Problem 17–5 1. Select the problem set for Sunset Surfwear (Prob. 17–5). 2. Rename the company and set the system date. 3. Record all purchases on account using the Purchases/Receive Inventory option. 4. Print a Purchases Journal report. 5. Proof your work. 6. Complete the Analyze activity. 7. End the session.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 17–4 Recording Payment of the Payroll Denardo’s Country Store pays its employees on a biweekly basis. This week the payroll is $2,000. You issued Check 949 for $1,487 in payment of the payroll less the following amounts: Employees’ Federal Income Tax, $320; Employees’ State Income Tax, $40; Social Security Tax, $124; and Medicare Tax, $29.

Instructions In your working papers, record the July 15 payroll on page 4 of the cash payments journal.

Analyze

Calculate the total deductions from employees’ wages for federal, state, social security, and Medicare taxes. What percentage of gross payroll is this amount?

Problem 17–5 Recording Transactions in the Purchases Journal Sunset Surfwear had the following purchases transactions for the month of July.

Instructions Use the purchases journal in your working papers. 1. Record each of the following transactions on page 4 of the purchases journal. 2. Foot, prove, total, and rule the purchases journal. Date

July

Transactions

1

Purchased merchandise on account from Waverunner Designs for $1,200, Invoice WD121. 3 Received Invoice CA552 from Capital Accessories for the purchase of $1,600 in merchandise on account. 5 Purchased $2,000 in store equipment on account from Neilson Store Equipment, Invoice NS444. 9 Purchased $870 in merchandise on account from Kelley Apparel Inc., Invoice KA772. 12 Purchased $250 in supplies from Moore Paper & Office Supply Co., Invoice MPS266. 15 Purchased $1,800 in merchandise on account from AcaTan Products, Invoice ATP99. CONTINUE

TIP: Remember to change the G/L Account field as needed for general purchases.

508

Chapter 17 Problems

480-515_CH17_868829.indd 508

4/6/06 6:19:30 PM

Problems Date

Transactions (cont.)

July 18 Purchased $500 in office equipment on account from Moore Paper & Office Supply Co., Invoice MPS275. 22 Received Invoice WD156 from Waverunner Designs for the purchase of $900 in merchandise on account. 25 Purchased $475 in merchandise on account from Capital Accessories, Invoice CA560. 28 Purchased from Kelley Apparel Inc. $390 in merchandise on account, Invoice KA800. 30 Received Invoice NS460 from Neilson Store Equipment for the purchase of $1,200 in store equipment on account.

Analyze

Calculate the total purchases on account for the month.

CHAPT E R 1 7 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 17–5 1. Restore the Problem 17-5.QBB file. 2. Enter all purchases on account using the Enter Bills option. 3. Print a Journal report. 4. Proof your work. 5. Print a Vendor Balance Summary. 6. Complete the Analyze activity. 7. Back up your work.

Problem 17–6 Recording and Posting Purchases Shutterbug Cameras, a retail merchandising business, had the following purchases on account for the month of July. In the working papers, the beginning balances in the accounts are opened for you.

Instructions In your working papers: 1. 2. 3. 4.

Record July’s transactions on page 18 of the purchases journal. Post to the accounts payable subsidiary ledger accounts daily. Post amounts entered in the General Debit column daily. Foot, prove, total, and rule the purchases journal at the end of the month. 5. Post the column totals at the end of the month to the account named in the column heading. 6. Prepare a schedule of accounts payable. Date

July

Transactions

1 Purchased $1,200 in merchandise on account from U-Tech Products, Invoice UT220. 3 Purchased $140 in supplies on account from State Street Office Supply, Invoice 983, n/30. 6 Received Invoice 1338 from Photo Emporium for the purchase of $150 in merchandise on account, 2/10, n/30. 9 Invoice 445 for $90 was sent by Allen’s Repair for plumbing repairs completed at the store (Maintenance Expense). 12 Purchased $800 in merchandise on account from Video Optics Inc., Invoice VO167, 3/15, n/45. 15 Received Invoice 1322 from Digital Precision Equipment for the purchase of $2,500 in store equipment on account, n/30.

SMART GUIDE Step–by–Step Instructions: Problem 17–6 1. Select the problem set for Shutterbug Cameras (Prob. 17–6). 2. Rename the company and set the system date. 3. Record all purchases on account using the Purchases/Receive Inventory option. 4. Print a Purchases Journal report. 5. Proof your work. 6. Print a General Ledger report and a Vendor Ledgers report. 7. Complete the Analyze activity. 8. End the session.

TIP: Remember to change the G/L Account field for purchases other than merchandise.

CONTINUE

Chapter 17 Problems

480-515_CH17_868829.indd 509

509

9/16/05 11:44:29 AM

Problems

C H A P T ER 17 Date

Transactions (cont.)

July 18

Purchased $1,300 in merchandise on account from U-Tech Products, Invoice UT257. Purchased $400 in supplies on account from ProStudio Supply, Invoice 4677. Photo Emporium sent Invoice 1359 for the purchase of $600 of merchandise on account. Received Invoice 478 for $120 from Allen’s Repair for additional plumbing work completed at the store. Purchased $200 in merchandise on account from Video Optics Inc., Invoice VO183.

20 23 26 28

Analyze

SMART GUIDE Step–by–Step Instructions: Problem 17–7 1. Select the problem set for River’s Edge Canoe & Kayak (Prob. 17–7). 2. Rename the company and set the system date. 3. Record all cash payments using the Payments option. 4. Print a Cash Disbursements Journal report. 5. Proof your work. 6. Print a General Ledger report and a Vendor Ledgers report. 7. Complete the Analyze activity. 8. End the session.

TIP: Sometimes you may have to manually enter a cash discount when you record a cash payment.

Problem 17–7 Recording and Posting Cash Payments River’s Edge Canoe & Kayak is a retail merchandising business located in Jackson Hole, Wyoming. The beginning balances of the accounts needed to complete this problem are opened in your working papers.

Instructions In your working papers: 1. Record the transactions on page 19 of the cash payments journal. 2. Post the individual amounts in the Accounts Payable Credit column on a daily basis to the creditors’ accounts. 3. Post the individual amounts in the General Debit and Credit columns on the date the transaction occurred. 4. Foot, prove, total, and rule the cash payments journal. 5. Post the column totals at the end of the month. 6. Prepare a schedule of accounts payable. 7. Prove cash at the end of the month. The beginning Cash in Bank balance was $8,000; cash receipts were $7,000; and the ending check stub balance is $8,402. Date

July

Transactions

1

3

510

Explain what problems would occur if the transaction of July 23 (Photo Emporium) was posted to the accounts payable subsidiary ledger as $60.

Issued Check 1405 for $1,372 to North American Waterways Suppliers in payment on account of $1,400 invoice less a 2% discount. Received insurance premium statement from Rocky Mountain Insurance Company. Issued Check 1406 for $1,800. CONTINUE

Chapter 17 Problems

480-515_CH17_868829.indd 510

9/16/05 11:44:31 AM

Problems Date

July

Transactions (cont.)

5 Issued Check 1407 to Pacific Wholesalers for $500 to apply on account. 8 Received an invoice for $300 from Jackson News for advertising. Issued Check 1408. 12 Issued Check 1409 for $686 to Trailhead Canoes in payment on account of $700 invoice less a 2% discount. 15 Issued Check 1410 for $200 to Rollins Plumbing Service in full payment of the amount owed on account. 18 Issued Check 1411 for $75 to Ben Jacobs for completing odd jobs in the store (Miscellaneous Expense). 20 Purchased $90 in supplies from StoreMart Supply by issuing Check 1412. 22 Paid StoreMart Supply $400 to apply on account, Check 1413. 24 Issued Check 1414, $700 to Office Max, store equipment. 25 Paid Mohican Falls Kayak Wholesalers $200 to apply on account, Check 1415. 26 Issued Check 1416 to Office Max, $150 to apply on account. 28 Paid transportation charges of $125 to Stein’s Trucking, Check 1417.

Analyze

CHALLENGE PROBLEM

CHAPT E R 1 7

Identify the amount that River’s Edge owes its creditors at month end.

Problem 17–8 Recording and Posting Purchases and Cash Payments

Buzz Newsstand had the following purchases and cash payment transactions for July. The balance in the accounts payable subsidiary ledger and general ledger accounts are opened in the working papers.

Instructions In your working papers:

SMART GUIDE Step–by–Step Instructions: Problem 17–8 1. Select the problem set for Buzz Newsstand (Prob. 17–8). 2. Rename the company and set the system date. 3. Enter the purchases on account. 4. Record all cash payments. 5. Print the following reports: Purchases Journal, Cash Disbursements Journal, and Vendor Ledgers. 6. Proof your work. 7. Print a General Ledger report. 8. Complete the Analyze activity. 9. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 17–8 1. Restore the Problem 17-8.QBB file. 2. Enter the purchases on account. 3. Record all cash payments. 4. Print a Journal report and a Vendor Balance Summary. 5. Proof your work. 6. Print a General Ledger report. 7. Complete the Analyze activity. 8. Back up your work.

1. Record the purchases and cash payment transactions on page 12 of the purchases journal and page 12 of the cash payments journal. 2. Post to the creditors’ accounts in the accounts payable subsidiary ledger daily. 3. Post from the General Debit and Credit columns of the journals on the date the transaction occurred. SOURCE DOCUMENT 4. Foot, prove, total, and rule both journals. PROBLEM 5. Post the column totals of the purchases journal to the general ledger Problem 17–8 accounts named in the column headings. Use the source documents 6. Post the column totals of the cash payments journal to the general in your working papers to ledger accounts named in the column headings. complete this problem. 7. Prepare a schedule of accounts payable. CONTINUE

Chapter 17 Problems

480-515_CH17_868829.indd 511

511

4/6/06 6:19:33 PM

Problems

C H A P T ER 17

8. Prepare a cash proof at the end of the month. The beginning Cash in Bank balance was $9,000. Cash receipts were $10,500. The check stub balance on July 31 is $10,178. Date

July

Transactions

1 2 2 4 5 7 9 12 14 15 16 18 20 22 23 25 28 30

Analyze

512

Issued Check 2455 for $1,552 to ADC Publishing in payment on account of $1,600 invoice less a 3% discount. Purchased $400 in merchandise on account from Pine Forest Publications, Invoice PFP144, terms 2/10, n/30. Paid Candlelight Software $1,358 in payment of $1,400 account less a 3% discount, Check 2456. Issued Check 2457 to Nomad Computer Sales for $350 to apply on account. Purchased $2,000 in store equipment on account from CorpTech Office Supply, Invoice CT67. Issued Check 2458 for $125 to Wolfe Trucking for transportation charges. Purchased $900 in merchandise on account from American Trend Publishers, Invoice ATP98. Purchased $300 in supplies on account from CorpTech Office Supply, Invoice CT72. Issued Check 2459 to Delta Press for $750 to apply on account. Received insurance premium statement from SeaTac Insurance Co. for $1,600. Issued Check 2460. Check 2461 was issued for $882 to American Trend Publishers in payment of $900 account less a 2% discount. Purchased $500 in merchandise on account from Candlelight Software, Invoice CS101, terms n/30. Purchased $200 in merchandise on account from Nomad Computer Sales, Invoice NC56, terms 2/10, n/30. Paid Pine Forest Publications $100 to apply on account, Check 2462. Issued Check 2463 for $2,000 to CorpTech Office Supply to apply on account. Purchased $600 in merchandise on account from ADC Publishing, Invoice ADC70. Issued Check 2464 for $450 to Nomad Computer Sales to apply on account. Recorded the bank service charge of $25. Recorded the bankcard fees, $130. July bank statement. Examine the purchases made during July and determine the dollar amount by which merchandise inventory increased.

Chapter 17 Problems

480-515_CH17_868829.indd 512

9/16/05 11:44:33 AM

Winning Competitive Events

CHA PTER 17

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. A listing of vendor accounts, account balances, and total amount due all vendors is a a. schedule of accounts payable. b. schedule of accounts receivable. c. schedule of vendors. d. schedule of creditors. Use the following choices for questions 2–4. Write the letter for the correct journal used to journalize each transaction. a. Purchases Journal b. Cash Receipts Journal c. Cash Payments Journal d. General Journal e. Sales Journal 2. Purchased merchandise for cash. 3. Paid cash on account. 4. Purchased merchandise on account.

Business Professionals of America MULTIPLE CHOICE 5. Just for You Shoes purchased shoes for its two retail locations. The mall store ordered 20 pairs at $29.90/pair and 40 pairs at $18.50/pair. The downtown store ordered 35 pairs at $29.90/pair and 24 pairs at $18.50/pair. What was the total cost of the shoes for the two stores? a. $96.50 b. $193.50 c. $2,828.50 d. $2,703.10

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 17. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

480-515_CH17_868829.indd 513

Chapter 17 Winning Competitive Events

513

10/13/05 10:32:49 PM

C H A P T ER 17 Critical Thinking

Special Journals: Purchases and Cash Payments

CASE

STUDY

Merchandising Business: Books & More

ETHICS

Insufficient Funds

a mattoefr

))

$ )) Communicating ACCOUNTING

514

Real-World Applications and Connections

1. Describe the purpose of the purchases and the cash payments journals. 2. Your test for the equality of debits and credits of the purchases journal does not balance. Explain how you would go about finding the error(s). 3. You are instructed to prepare a schedule of accounts payable and prove its accuracy. How do you perform the task? 4. Explain why the purchase of supplies is not recorded in the special columns of the purchases journal, store equipment is not recorded in the journal’s Purchases Debit column, and the General Debit column of the purchases journal is not posted to the general ledger. 5. Your accounting supervisor asks you to prepare a cash proof for the month. What accounting documents do you need? What steps will you perform? 6. Explain why it is important to prove cash. Books & More sells hardcover and paperback books, music tapes, and CDs. It keeps a large stock of merchandise and orders new products often. The store may place an order for fast-selling items, such as a popular new CD, weekly. You recently noticed two invoices for three dozen CDs ordered from the same music wholesaler. The CDs ordered and the amounts on both invoices are identical. INSTRUCTIONS 1. Explain how you would determine whether the invoices are for two different orders or are duplicate invoices for one order. 2. Suggest steps to ensure that the company does not pay duplicate invoices. As the owner of a sporting goods store, you manage the accounting records. Your delivery van has been in the shop for repairs and you need it back as soon as possible. The mechanic calls with the repair cost, which is much higher than you expected. Your checking account cannot cover the bill, but you authorize the work anyway. If you write a check for the repairs, you believe the account will have enough money when the mechanic cashes the check. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Requesting Information Thomas Sampson is a purchasing agent for Complete Offices. He gave you an envelope full of receipts from a 10-day business trip without any explanations. Write a memo asking Thomas to identify which are cash purchases and which are purchases on account. Refer specifically to payment terms as you explain the information you need to analyze the transactions.

Chapter 17 Real-World Applications and Connections

480-515_CH17_868829.indd 514

9/16/05 11:44:37 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 1 7

Selecting Equipment and Tools Web Works is an online computer assistance service specializing in applications accessible through the Internet. In a recent staff meeting, Shelly Lazarus, your manager, asked you to assess online invoice payment. INSTRUCTIONS 1. Use the Internet and read software reviews to explore different options for paying invoices online. Prepare a table showing the comparative data. 2. Draft a memorandum with your recommendations for the hardware and software Web Works will need to facilitate online invoice payment. Proofread the draft, make corrections as needed, and prepare the final memorandum.

International Competitive Advantage If your company has resources, products, or skills that are valuable, unique, or difficult to imitate globally, it has an international competitive advantage. For example Wal-Mart has developed its inventory management and purchasing system into a powerful resource that has given it a sustained competitive advantage in the international retailing industry. INSTRUCTIONS Brainstorm other resources or skills a company might use to gain international competitive advantage.

Your Federal Income Tax If you are working, you know that your employer withholds federal income tax from your earnings each payday as required by law. You may also be required to file a federal tax return each year, either manually or electronically. PERSONAL FINANCE ACTIVITY Assume you have a part-time job. List the information that you need to know about filing a federal income tax return. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 17.

Cost of Sales To increase profits, corporations must increase sales or decrease costs. They share information about both in their annual reports. PETsMART’s annual report has a section labeled Management’s Discussion and Analysis of Financial Condition and Results of Operations. It includes a comparison of net sales and gross profit for the current year and previous year. Here is how gross profit is calculated:

Sales
Cost of Sales  Gross Profit INSTRUCTIONS Refer to the Fiscal 2003 Compared to Fiscal 2002 section of PETsMART’s annual report in Appendix F to answer these questions. 1. What items do you think would be included in PETsMART’s cost of sales? 2. What factors contributed to a higher gross profit in 2003 versus 2002?

glencoeaccounting.glencoe.com

480-515_CH17_868829.indd 515

Chapter 17 Real-World Applications and Connections

515

9/16/05 11:44:40 AM

CH A P T ER 18

Adjustments and the Ten-Column Work Sheet BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe the parts of a ten-column work sheet.

2.

Generate trial balances and end-of-period adjustments.

1. 2. 3. 4.

3.

Determine which general ledger accounts to adjust.

4.

Calculate the adjustments.

5.

Prepare a ten-column work sheet.

6.

Journalize the adjustments.

7.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

Not all financial changes are caused by transactions with other businesses or individuals. Some financial changes occur within a business.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING ADJUSTMENTS

Plantronics, Inc. “That’s one small step for man, one giant leap for mankind.” As Neil Armstrong stepped onto the moon’s surface in 1969, his famous words were delivered via a Plantronics headset. Since then, Plantronics, Inc. has taken giant steps in the lightweight communications headset industry. Some of its best sellers include wireless headsets for cell phones and iPods. U.S. soldiers, emergency response teams, and air traffic controllers also use the company’s headsets. Plantronics, like other companies, takes a physical count of inventory at the end of every fiscal period. Then it adjusts the accounting records so the Merchandise Inventory account matches the inventory it actually holds.

What Do You Think? Can you think of other general ledger accounts like Merchandise Inventory that might need an adjustment?

516

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 516

9/14/05 5:49:29 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE A merchandising business uses the work sheet for collecting and organizing financial information. In large businesses, several people might work on different parts of the work sheet. For example, one person might be responsible for accounts payable information and others for accounts receivable and payroll. The staff works as a team to prepare the work sheet. A team or project leader makes sure all team members complete their assigned sections.

glencoeaccounting.glencoe.com

516-549_CH18_868829.indd 517

Personal Connection 1. In your workplace are you asked to participate in group or team assignments? 2. How do team members work with each other? 3. What skills are needed to work well in a team?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 18 to learn more about the real-world workplace.

517

9/14/05 5:49:44 PM

SECTION 1

BEFORE YOU

READ

Main Idea

Adjustments transfer the cost of “used up” assets to expense accounts. Adjustments for changes in merchandise inventory are made directly to the Income Summary account.

Read to Learn… ➤ the purpose of the

ten-column work sheet. (p. 518) ➤ how to use the ten-column work sheet for adjustments. (p. 518)

Key Terms

adjustment beginning inventory ending inventory physical inventory

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory Recall that the work sheet is the basis for preparing end-of-period journal entries and financial statements. The purpose of all period-end reports is to provide essential information about a company’s financial position.

Completing End-of-Period Work What Is the Purpose of the Ten-Column Work Sheet? The general ledger summarizes the effects of business transactions on individual accounts for an accounting period. Managers, stockholders, and creditors need more than account totals, however, to evaluate performance. They need to know net income and the value of stockholders’ equity, which for a corporation is like owner’s equity for a sole proprietorship. They need this information to make sound business decisions. Earlier you worked with a six-column work sheet prepared for a service business organized as a sole proprietorship. In this chapter you will prepare a ten-column work sheet for a merchandising business organized as a corporation. This work sheet is the basis for preparing end-of-period financial statements, adjusting entries, and closing entries.

The Ten-Column Work Sheet How Is the Ten-Column Work Sheet Different from the Six-Column Work Sheet? The work sheet in Chapter 8 had six amount columns. The work sheet in this chapter, however, has ten amount columns. The additional columns are for the Adjustments and Adjusted Trial Balance sections. Prepared in the same way as the six-column work sheet, the tencolumn work sheet has five amount sections instead of three: • • •

Trial Balance Adjustments Adjusted Trial Balance

• •

Income Statement Balance Sheet

Completing the Trial Balance Section A trial balance is prepared to prove the equality of debits and credits in the general ledger. Figure 18–1 shows the end-of-period trial balance for On Your Mark Athletic Wear. To prepare the trial balance, the number and name of each account in the general ledger are entered on the work sheet in the Account Number 518

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 518

9/14/05 5:50:34 PM

and Account Name columns. The accounts are listed in the order that they appear in the general ledger (Asset, Liability, Stockholders’ Equity, Revenue, Cost of Merchandise, Expense). The balance of each account is entered in the appropriate Debit or Credit column of the Trial Balance section. Notice that every general ledger account is listed, even those with zero balances. After all balances are entered, the Trial Balance Debit and Credit columns are ruled, totaled, and proved. Then a double rule is drawn across both columns.

Calculating Adjustments Not all changes in account balances result from daily business transactions. Some result from internal business operations or the passage of time.

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

101 115 125 130 135 140 145 150 201 204 205 211 212 213 214 215 220 301 305 310 401 405 410 501 505 510 515 601 605 630 635 650 655 657 660 665 670 680

39 40

TRIAL BALANCE ACCOUNT NAME

DEBIT

15 1 7 9 00 Cash in Bank 10 4 0 4 00 Accounts Receivable 84 9 2 1 00 Merchandise Inventory 5 5 4 9 00 Supplies 1 5 0 0 00 Prepaid Insurance 19 8 3 1 00 Delivery Equipment 9 8 2 5 00 Office Equipment 5 2 0 0 00 Store Equipment Accounts Payable Fed. Corp. Inc. Tax Payable Employees’ Fed. Inc. Tax Pay. Employees’ State Inc. Tax Pay. Social Security Tax Payable Medicare Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Capital Stock Retained Earnings Income Summary Sales 7 3 0 00 Sales Discounts 2 0 0 0 00 Sales Returns & Allowances 206 7 0 0 00 Purchases 4 0 3 6 18 Transportation In Purchases Discounts Purchases Returns & Allowances 2 4 5 0 00 Advertising Expense 4 1 9 9 27 Bankcard Fees Expense 9 8 4 0 00 Fed. Corp. Income Tax Expense Insurance Expense 3 5 1 9 25 Maintenance Expense 3 4 8 28 Miscellaneous Expense 3 8 2 6 83 Payroll Tax Expense 14 0 0 0 00 Rent Expense 29 3 7 4 60 Salaries Expense Supplies Expense 2 3 6 4 87 Utilities Expense 435 7 9 8 28

CREDIT

CULTURAL Diversity Holiday Observances When

13 8 5 0 00 6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19

working with clients from other countries, be aware of their holiday schedules. There are over 800 holidays around the world during which businesses shut down. Some countries have such diverse ethnic populations that they observe religious holidays for over 10 major religions!

320 4 5 0 00

1 3 4 0 00 1 8 0 0 00

435 7 9 8 28

Figure 18–1 The Trial Balance Section of the Work Sheet

Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory

516-549_CH18_868829.indd 519

519

9/14/05 5:50:40 PM

AS YOU

READ

Instant Recall Matching Principle The matching principle requires revenue to be recorded in the same period as the expenses incurred to earn it.

520

For example, supplies such as paper, pens, shopping bags, and sales slips are bought for use by the business. They are recorded in an asset account called Supplies. These supplies are used gradually during the accounting period. Another example is insurance premiums, which cover a certain period of time. The premiums are recorded in an asset account called Prepaid Insurance. During the period some insurance is used up, or expires. At the end of the period, the balances in accounts such as Supplies and Prepaid Insurance are brought up to date. To illustrate, suppose that supplies costing $500 were purchased during an accounting period and recorded in the Supplies account. At the end of the period, the Supplies account balance is $500; however, only $200 of supplies are still on hand. The account balance for Supplies is adjusted downward to show that the business used $300 of supplies. Permanent Accounts and Temporary Accounts. Up to this point, the general ledger account balances have been changed by journal entries made to record transactions that are supported by source documents. There are no source documents, however, for the changes in account balances caused by the internal operations of a business or the passage of time. Such changes are recorded through adjustments made at the end of the period to the account balance. An adjustment is an amount that is added to or subtracted from an account balance to bring that balance up to date. Every adjustment affects at least one permanent account and one temporary account. At the end of the period, adjustments are made to transfer the costs of the assets consumed from the asset accounts (permanent accounts) to the appropriate expense accounts (temporary accounts). Accountants say that these assets are “expensed” because the costs of consumed assets are expenses of doing business. Thus, when an adjustment is recorded, the expenses for a given period are matched with the revenue for that period. The work sheet’s Adjustments section is used to record the adjustments made at the period-end to bring various account balances up to date. Determining the Adjustments Needed. How do you generate end-of-period adjustments? Review each account balance in the work sheet’s Trial Balance section. If the balance for an account is not up to date as of the last day of the fiscal period, that account balance must be adjusted. Refer to Figure 18–1 on page 519. The first account listed is Cash in Bank. All cash received or paid out during the period was journalized and posted to the Cash in Bank account. This balance is up to date. The next account, Accounts Receivable (controlling), is also up to date since all amounts owed or paid by charge customers were journalized and posted. The third account is Merchandise Inventory, used to report the cost of merchandise on hand. The balance reported in the Trial Balance section ($84,921) is the merchandise on hand at the beginning of the period. The amount of merchandise on hand is constantly changing during the period. The changes are not recorded in the Merchandise Inventory account. During the period the cost of merchandise purchased is recorded in the Purchases account. As merchandise sales reduce inventory, the amount of each sale is recorded in the Sales account, not Merchandise Inventory.

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 520

4/6/06 6:16:02 PM

At the end of the period, the balance in the Merchandise Inventory account does not reflect the amount of merchandise on hand. So the Merchandise Inventory account balance must be adjusted. The other account balances on the work sheet are reviewed in the same manner. Additional adjustments are made as described later in this chapter.

Adjusting the Merchandise Inventory Account Merchandise Inventory is an asset account used by merchandising businesses. Beginning inventory is the merchandise a business has on hand and available for sale at the beginning of a period. Ending inventory is the merchandise on hand at the end of a period. The ending inventory for one period becomes the beginning inventory for the next period. The account balance of Merchandise Inventory does not change during the period. It is changed only when a physical inventory is taken. A physical inventory is an actual count of all merchandise on hand and available for sale. A physical inventory can be taken at any time. One is always taken at the end of a period. For example, if a toy store counts inventory at the end of a period, it can calculate the cost of inventory. This is done by multiplying the quantity of each item by its unit cost. At the end of each period, after the physical inventory has been taken and the cost of ending inventory has been calculated, the ending inventory amount replaces the beginning inventory amount recorded in Merchandise Inventory. This is accomplished by an adjustment to Merchandise Inventory.

AS YOU

READ

Key Point Adjustments Adjustments help match expenses with related revenue.

Calculating the Adjustment for Merchandise Inventory. When calculating the adjustment for Merchandise Inventory, you need to know (1) the Merchandise Inventory account balance and (2) the physical inventory amount. For On Your Mark, this is: Merchandise Inventory account balance Physical inventory

$84,921 81,385

Adjustment To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

1. The accounts Merchandise Inventory and Income Summary are affected. 2. Merchandise Inventory is an asset account (permanent). Income Summary is a stockholder’s equity account. 3. Merchandise Inventory is decreased by $3,536. This amount is transferred to Income Summary.

4. To transfer the decrease in Merchandise Inventory, debit Income Summary for $3,536. 5. Decreases to asset accounts are recorded as credits. Credit Merchandise Inventory for $3,536.

Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory

516-549_CH18_868829.indd 521

521

9/14/05 5:50:55 PM

6.

T ACCOUNTS

Merchandise Inventory

Income Summary Debit

Credit

Credit
3,536

Debit 

3,536

The effect of all the purchases and sales during the period is a decrease to Merchandise Inventory of $3,536 ($84,921
$81,385). This reduction in inventory needs to be recorded as an adjustment in the accounting records. The two accounts affected by the inventory adjustment are Merchandise Inventory and Income Summary. If the ending inventory amount is higher than beginning inventory, Merchandise Inventory is debited and Income Summary is credited. For example, suppose that the beginning inventory was $84,921 and the ending inventory is $88,226. Inventory increased by $3,305 ($88,226
$84,921). The Merchandise Inventory account is debited for $3,305, and Income Summary is credited for $3,305.

Merchandise Inventory Debit  3,305

Credit


Income Summary Debit

Entering the Adjustment for Merchandise Inventory on the Work Sheet. Adjustments are entered in the Adjustments

Credit 3,305

columns of the work sheet. The debit and credit parts of each adjustment are given a unique label. The label consists of a small letter in parentheses and is placed just above and to the left of the adjustment amounts. The adjustments are labeled as follows: First adjustment Second adjustment Third adjustment

(a) (b) (c)

The number of adjustments varies depending on the business. Once the adjustments have been entered, the work sheet provides the information needed to make the adjusting journal entries. Use the T accounts in step 6 of the preceding example as a guide to entering the inventory adjustment on the work sheet. Refer to Figure 18–2. To record the adjustment for Merchandise Inventory: 1. In the Adjustments Debit column, enter the debit amount of the adjustment on the Income Summary line. Label this amount (a). 2. In the Adjustments Credit column, enter the credit amount of the adjustment on the Merchandise Inventory line. Label it (a) also.

ACCT. NO. 1

Figure 18–2 Recording the Adjustment for Merchandise Inventory on the Work Sheet

522

2 3

20

TRIAL BALANCE ACCOUNT NAME

101 Cash in Bank 115 Accounts Receivable 125 Merchandise Inventory 310 Income Summary

DEBIT

CREDIT

ADJUSTMENTS DEBIT

15 1 7 9 00 10 4 0 4 00 84 9 2 1 00

CREDIT

(a) 3 5 3 6 00 (a) 3 5 3 6 00

21

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 522

9/14/05 5:50:56 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Using a diagram like this one, summarize the steps for determining the Merchandise Inventory adjustment and entering it on the work sheet. Add answer boxes for steps as needed.

4HE-ERCHANDISE)NVENTORY!DJUSTMENT

Do the Math Your company, Photo Shots, is looking to expand its merchandise, but the accounting manager wants to analyze inventory data for the last three years before recommending expansion. Using the data given, create a bar graph to depict the total amount of merchandise sold by year. Use the formula (Beginning Inventory + Purchases) – Ending Inventory = Cost of Merchandise Sold. Write a short paragraph summarizing your analysis of the results. Merchandise Inventory in U.S.$ Year Year 1 Year 2 Year 3

Beginning 900 1,000 2,000

Ending 1,000 2,000 1,500

Purchases 5,000 8,000 7,500

Problem 18–1 Analyzing the Adjustment for Merchandise Inventory Ely Corporation, a custom furniture manufacturer, has a general ledger account balance of $73,395 for Merchandise Inventory as of July 1. On the following June 30, the end of the fiscal period, Ely took a physical inventory and determined it had $74,928 in merchandise on hand. In your working papers, answer the following questions regarding the adjustment for Merchandise Inventory: 1. Is the value of the ending inventory more or less than the value of the beginning inventory? 2. What is the amount of the inventory adjustment? 3. Which account is debited? 4. Which account is credited? Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory

516-549_CH18_868829.indd 523

523

4/6/06 6:16:06 PM

Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax

SECTION 2

BEFORE YOU

READ

Main Idea

Adjustments show the dollar amount of assets consumed during the period. They also recognize the corporation’s income tax expense.

Read to Learn… ➤ how and why the

Supplies account is adjusted. (p. 524) ➤ how and why the Prepaid Insurance account is adjusted. (p. 525) ➤ how and why the Federal Corporate Income Tax Expense account is adjusted. (p. 527)

Key Terms prepaid expense

In Section 1 you learned that at the end of the period, the accountant must update the Merchandise Inventory account and adjust other accounts in the general ledger. For example insurance is a costly expense for high-risk businesses, such as building construction and demolition. Thus, the financial statements must reflect the proper insurance expenses each period. Supplies and federal corporate income taxes also represent significant expenses that must be reported accurately.

Adjusting the Supplies Account Why Do You Make an Adjustment for Supplies? A merchandising business buys various supplies for employees to use in the everyday operations of the business. Pencils, pens, computer paper, shopping bags, sales slips, price tags, and cash register tapes are purchased, and the cost is debited to the Supplies account. Supplies are used daily. As they are consumed, they become expenses of the business. Keeping daily records of each item as it is used is inefficient, so the Supplies account is updated at the end of the period. In the Trial Balance section of the work sheet in Figure 18–1 on page 519, the balance of the Supplies account is $5,549. This amount is the cost of the supplies on hand on January 1 plus the cost of the additional supplies purchased during the period. At the end of December, On Your Mark took a physical inventory. It found that $1,839 of supplies were on hand, meaning that it used $3,710 of supplies during the period ($5,549
$1,839  $3,710). The amount of supplies on hand decreased by $3,710. Therefore, Supplies (a permanent asset account) is credited for $3,710. Supplies Expense (a temporary account) is debited (increased) to record the cost of supplies used in the period.

Adjustment Record the adjustment for supplies. ANALYSIS

Identify Classify
/

524

1. The accounts affected are Supplies and Supplies Expense. 2. Supplies is an asset account (permanent). Supplies Expense is an expense account (temporary). 3. Supplies is decreased by $3,710. Supplies Expense is increased by $3,710.

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 524

9/14/05 5:51:26 PM

DEBIT-CREDIT RULE

4. Increases to expense accounts are recorded as debits. Debit Supplies Expense for $3,710. 5. Decreases to asset accounts are recorded as credits. Credit Supplies for $3,710.

T ACCOUNTS

6.

Supplies

Supplies Expense Debit  3,710

Credit


Credit
3,710

Debit 

The adjustment for supplies is shown in Figure 18–3 on page 526. To enter the adjustment on the work sheet, follow these steps: 1. In the Adjustments Debit column, enter the debit amount of the adjustment on the Supplies Expense line. Since this is the second adjustment, label it (b). 2. In the Adjustments Credit column, enter the credit amount of the adjustment on the Supplies line. Label it (b) also.

Adjusting the Prepaid Insurance Account Why Do You Make an Adjustment for Insurance? On December 17 On Your Mark purchased an insurance policy for six months, mid-December through mid-May. The accounting clerk debited the premium of $1,500 ($250 per month) to the Prepaid Insurance account. This is an example of a prepaid expense , an expense paid in advance. At the end of December, the Prepaid Insurance balance is $1,500 (see the work sheet’s Trial Balance section in Figure 18–1). However, the coverage for half of a month, costing $125, has expired. The value of the unexpired portion of the coverage has decreased to $1,375 ($1,500
$125), so the clerk adjusts Prepaid Insurance with a $125 credit to update its balance. The adjustment records the expired portion as a business expense.

AS YOU

READ

In Your Experience Prepaid Have you heard the term prepaid before now? What type of product or service can be prepaid?

Adjustment Record the adjustment for the expiration of one-half month’s insurance coverage. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

1. The accounts affected are Insurance Expense and Prepaid Insurance. 2. Insurance Expense is an expense account (temporary). Prepaid Insurance is an asset account (permanent). 3. Insurance Expense is increased by $125. Prepaid Insurance is decreased by $125.

4. Increases to expense accounts are recorded as debits. Debit Insurance Expense for $125. 5. Decreases to asset accounts are recorded as credits. Credit Prepaid Insurance for $125.

Section 2 Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax

516-549_CH18_868829.indd 525

525

9/14/05 5:51:29 PM

6.

T ACCOUNTS

Insurance Expense Debit  125

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Figure 18–3 Recording the Adjustments on the Work Sheet

37 38 39

101 115 125 130 135 140 145 150 201 204 205 211 212 213 214 215 220 301 305 310 401 405 410 501 505 510 515 601 605 630 635 650 655 657 660 665 670 680

Prepaid Insurance

Credit


Credit
125

Debit 

TRIAL BALANCE ACCOUNT NAME

DEBIT

Cash in Bank 15 1 7 9 00 Accounts Receivable 10 4 0 4 00 Merchandise Inventory 84 9 2 1 00 Supplies 5 5 4 9 00 Prepaid Insurance 1 5 0 0 00 Delivery Equipment 19 8 3 1 00 Office Equipment 9 8 2 5 00 Store Equipment 5 2 0 0 00 Accounts Payable Fed. Corp. Inc. Tax Payable Employees’ Fed. Inc. Tax Pay. Employees’ State Inc. Tax Pay. Social Security Tax Payable Medicare Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Capital Stock Retained Earnings Income Summary Sales Sales Discounts 7 3 0 00 Sales Returns and Allowances 2 0 0 0 00 Purchases 206 7 0 0 00 Transportation In 4 0 3 6 18 Purchases Discounts Purchases Returns and Allowances Advertising Expense 2 4 5 0 00 Bankcard Fees Expense 4 1 9 9 27 Fed. Corp. Income Tax Expense 9 8 4 0 00 Insurance Expense Maintenance Expense 3 5 1 9 25 Miscellaneous Expense 3 4 8 28 Payroll Tax Expense 3 8 2 6 83 Rent Expense 14 0 0 0 00 Salaries Expense 29 3 7 4 60 Supplies Expense Utilities Expense 2 3 6 4 87 435 7 9 8 28

ADJUSTMENTS

CREDIT

CREDIT

DEBIT

(a) 3 5 3 6 00 (b) 3 7 1 0 00 (c)

1 2 5 00

(d)

1 5 5 00

13 8 5 0 00 6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19 (a) 3 5 3 6 00

320 4 5 0 00

1 3 4 0 00 1 8 0 0 00

(d) (c)

1 5 5 00 1 2 5 00

(b) 3 7 1 0 00

435 7 9 8 28

7 5 2 6 00

7 5 2 6 00

40

The adjustment for Prepaid Insurance is shown in Figure 18–3. To enter the adjustment on the work sheet, follow these steps: 1. In the Adjustments Debit column, enter the debit amount of the adjustment on the Insurance Expense line. Since this is the third adjustment, label it (c). 526

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 526

9/14/05 5:51:32 PM

2. In the Adjustments Credit column, enter the credit amount of the adjustment on the Prepaid Insurance line. Label it (c) also.

Adjusting the Federal Corporate Income Tax Accounts Why Does This Company Make an Adjustment for Income Tax? On Your Mark is organized as a corporation. A corporation is considered to be a legal entity separate from its owners. On Your Mark owns assets, pays its own debts, and enters into legal contracts. A corporation pays federal corporate income taxes on its net income. Many states and cities also tax corporate income. For now, we will discuss only federal corporate income taxes. A corporation’s accountant estimates its federal corporate income taxes for the coming year and pays that amount to the federal government in quarterly installments. At the end of the year, the exact net income and the tax on that income are determined. If the corporation owes additional taxes, it pays them when it files its corporate income tax return. At the beginning of the year, On Your Mark’s accountant estimated that its federal corporate income taxes would be $9,840. The business made quarterly payments of $2,460 in March, June, September, and December. These payments were journalized as debits to Federal Corporate Income Tax Expense and credits to Cash in Bank. At the end of the year, On Your Mark’s accountant determined that the federal corporate income tax for the year is $9,995. On Your Mark has already paid $9,840 (2,460  4). Therefore the business owes an additional $155 ($9,995
$9,840). To bring the accounting records up to date, Federal Corporate Income Tax Expense and Federal Corporate Income Tax Payable must both be increased by $155. The following T accounts illustrate this adjustment. Federal Corporate Income Tax Expense Debit  155

Credit


Federal Corporate Income Tax Payable Debit


Credit  155

The adjustment for Federal Corporate Income Tax Expense is shown in Figure 18–3. Since this is the fourth adjustment, it is labeled (d). After all adjustments have been entered, the Adjustments section of the work sheet is totaled and ruled. Each adjustment has an equal debit and credit, so the totals of the Adjustments Debit and Credit columns should be the same. When the Adjustments section has been proved, a double rule is drawn under the totals and across both columns, as shown in Figure 18–3.

Section 2 Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax

516-549_CH18_868829.indd 527

527

9/14/05 5:51:36 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a chart like this one to describe three adjustments discussed in Section 2. List the accounts to be debited and credited for each adjustment.

$ESCRIPTIONOF!DJUSTMENT

!CCOUNT$EBITED

!CCOUNT#REDITED

Do the Math You own a personal-training franchise called Your Body. You want to provide health insurance for your 10 employees. As you review the alternative plans, you have to make a decision based not only on affordability, but also on total benefits. Determine the total annual premium of each plan and decide which plan best fits your needs. Type of plan Monthly cost per employee Co-pay for each employee

Plan #1 $600 $10

Plan #2 $500 $20

Plan #3 $800 None

Problem 18–2 Analyzing Adjustments Information related to accounts requiring adjustment on the work sheet for the year ended December 31 for Star City Resorts Corporation follows. Indicate in your working papers the amount of each adjustment, which account is debited, and which account is credited. 1. The Trial Balance section shows a balance of $3,347.45 for Supplies. The amount of supplies actually on hand is $892.75. 2. Star City paid an annual insurance premium of $4,440 on November 1. 3. Star City made quarterly federal corporate income tax payments of $945 each. Its actual tax, calculated at the end of the year, is $3,885. 528

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 528

9/14/05 5:52:01 PM

SECTION 3

Completing the Work Sheet and Journalizing and Posting the Adjusting Entries

After the adjustments have been entered in the Adjustments section of the work sheet, proving that the accounts are still in balance is important. This is done by completing an adjusted trial balance. After proving the Adjusted Trial Balance section, the accountant can complete the work sheet.

Extending Work Sheet Balances What Does Extending Balances Involve? At this point the amounts for each account must be extended to, or carried over to, the Adjusted Trial Balance, the Income Statement, and the Balance Sheet sections.

Completing the Adjusted Trial Balance Section The next step after entering all adjustments is to finish the Adjusted Trial Balance section. This work sheet section shows the updated balances of all general ledger accounts. To complete this section, the accountant combines the balance of each account in the Trial Balance section with the adjustment, if any, in the Adjustments section. The new balance is then entered in the appropriate Adjusted Trial Balance column. Note the way new balances are computed in Figure 18–4 on page 530. If there is no adjustment, the account balance shown in the Trial Balance section is simply extended to the same column (Debit or Credit) in the Adjusted Trial Balance section. The first two accounts, Cash in Bank and Accounts Receivable, have no adjustments, so those balances are extended to the Adjusted Trial Balance Debit column. If the account balance in the Trial Balance section has an adjustment, the accountant calculates a new balance. The amount of the adjustment (from the Adjustments section) is added to or subtracted from the amount in the Trial Balance section. Add debits to debits; add credits to credits; subtract debits and credits. The first account in the Trial Balance section to have an adjustment is Merchandise Inventory. As you know from Section 1, Merchandise Inventory has an unadjusted debit balance of $84,921. Adjustment (a) is a credit of $3,536. To calculate the new balance, the accountant subtracts the credit adjustment from the debit balance. The adjusted balance of $81,385 ($84,921  $3,536) is extended to the Adjusted Trial Balance Debit column.

BEFORE YOU

READ

Main Idea

Adjustments affect the amount of net income (or net loss).

Read to Learn… ➤ how to complete the

ten-column work sheet. (p. 529) ➤ how to journalize and post the adjusting entries. (p. 531)

Key Terms adjusting entries

Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries

516-549_CH18_868829.indd 529

529

4/6/06 6:16:26 PM

TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

101 115 125 130 135 140 145 150 201 204 205 211 212 213 214 215 220 301 305 310 401 405 410 501 505 510 515 601 605 630 635 650 655 657 660 665 670 680

ACCOUNT NAME

DEBIT

15 1 7 9 00 Cash in Bank 10 4 0 4 00 Accounts Receivable 84 9 2 1 00 Merchandise Inventory 5 5 4 9 00 Supplies 1 5 0 0 00 Prepaid Insurance 19 8 3 1 00 Delivery Equipment 9 8 2 5 00 Office Equipment 5 2 0 0 00 Store Equipment Accounts Payable Fed. Corp. Inc. Tax Payable Employees’ Fed. Inc. Tax Pay. Employees’ State Inc. Tax Pay. Social Security Tax Payable Medicare Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Capital Stock Retained Earnings Income Summary Sales 7 3 0 00 Sales Discounts 2 0 0 0 00 Sales Returns and Allowances 206 7 0 0 00 Purchases 4 0 3 6 18 Transportation In Purchases Discounts Purchases Returns and Allowances 2 4 5 0 00 Advertising Expense 4 1 9 9 27 Bankcard Fees Expense 9 8 4 0 00 Fed. Corp. Income Tax Expense Insurance Expense 3 5 1 9 25 Maintenance Expense 3 4 8 28 Miscellaneous Expense 3 8 2 6 83 Payroll Tax Expense 14 0 0 0 00 Rent Expense 29 3 7 4 60 Salaries Expense Supplies Expense 2 3 6 4 87 Utilities Expense 435 7 9 8 28

ADJUSTMENTS

CREDIT

CREDIT

DEBIT

ADJUSTED TRIAL BALANCE DEBIT

15 10 (a) 3 5 3 6 00 81 (b) 3 7 1 0 00 1 (c) 1 2 5 00 1 19 9 5 13 8 5 0 00 (d)

13 8 5 0 00 1 5 5 00 6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19

1 5 5 00

6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19 (a) 3 5 3 6 00

CREDIT

1 7 9 00 4 0 4 00 3 8 5 00 8 3 9 00 3 7 5 00 8 3 1 00 8 2 5 00 2 0 0 00

3 5 3 6 00

320 4 5 0 00

320 4 5 0 00 7 3 0 00 2 0 0 0 00 206 7 0 0 00 4 0 3 6 18

1 3 4 0 00 1 8 0 0 00

1 3 4 0 00 1 8 0 0 00

435 7 9 8 28

2 4 5 0 00 4 1 9 9 27 9 9 9 5 00 1 2 5 00 3 5 1 9 25 3 4 8 28 3 8 2 6 83 14 0 0 0 00 29 3 7 4 60 3 7 1 0 00 2 3 6 4 87 7 5 2 600 435 9 5 3 28 435 9 5 3 28

(d) (c)

1 5 5 00 1 2 5 00

(b) 3 7 1 0 00

7 5 2 6 00

40

Figure 18–4 Extending Balances to the Adjusted Trial Balance Section of the Work Sheet The adjusted balances for Supplies, Prepaid Insurance, and Federal Corporate Income Tax Expense are calculated in the same way. If an account has a zero balance in the Trial Balance section, the amount listed in the Adjustments section is extended to the Adjusted Trial Balance section. Federal Corporate Income Tax Payable, for example, has a zero balance in the Trial Balance section. Adjustment (d) is a credit of $155. This amount is extended to the Adjusted Trial Balance Credit column. After extending all account balances to the Adjusted Trial Balance section, the accountant totals both columns. If total debits equal total credits, this section has been proved. The accountant then draws a double 530

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 530

9/14/05 5:52:07 PM

rule under the totals and across both columns. If total debits do not equal total credits, an error exists. To find it, re-add each column. If the error still exists, ensure that the Trial Balance and Adjustment amounts were extended properly to the Adjusted Trial Balance section.

Extending Amounts to the Balance Sheet and Income Statement Sections Beginning with line 1, each account balance in the Adjusted Trial Balance section is extended to the appropriate column of either the Balance Sheet or the Income Statement section. See these extensions in Figure 18–5 on pages 532 and 533. The Income Statement section contains the balances of all temporary accounts. You will find the Income Summary and all revenue, cost of merchandise, and expense accounts in this section. The Balance Sheet section contains the balances of all permanent accounts. In that section you will find all asset, liability, and capital accounts (Capital Stock and Retained Earnings).

Completing the Work Sheet After all amounts have been extended to the Balance Sheet and Income Statement sections, the accountant draws a single rule across the columns in these sections and totals all four columns (see Figure 18–5). Notice that the words Net Income have been written in the Account Name column on the same line as the net income amount. As you learned in Chapter 8, the totals of the debit and credit columns within the Balance Sheet and Income Statement sections are not equal at this point. The difference between the two column totals in each section is the amount of net income (or net loss) for the period. After the net income (or net loss) has been recorded, the columns in the Balance Sheet and Income Statement sections are ruled and totaled as shown in Figure 18–5. If the totals of the two Income Statement columns are equal, and the totals of the two Balance Sheet columns are equal, a double rule is drawn across all four columns. The double rule indicates that these sections of the work sheet have been proved.

Journalizing and Posting Adjusting Entries How Do You Journalize and Post Adjusting Entries? The journal entries that update the general ledger accounts at the end of a period are called adjusting entries . The Adjustments section of the work sheet is the source of information for journalizing the adjusting entries. The accounts debited and credited in the Adjustments section are entered in the general journal.

Journalizing Adjustments Before recording the first adjusting entry, the accountant writes the words Adjusting Entries in the Description column of the general journal. Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries

516-549_CH18_868829.indd 531

531

9/14/05 5:52:10 PM

On Your Mark Work For Year Ended ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Figure 18–5 On Your Mark Athletic Wear Completed Work Sheet

101 115 125 130 135 140 145 150 201 204 205 211 212 213 214 215 220 301 305 310 401 405 410 501 505 510 515 601 605 630 635 650 655 657 660 665 670 680

TRIAL BALANCE ACCOUNT NAME

DEBIT

Cash in Bank 15 1 7 9 00 Accounts Receivable 10 4 0 4 00 Merchandise Inventory 84 9 2 1 00 Supplies 5 5 4 9 00 Prepaid Insurance 1 5 0 0 00 Delivery Equipment 19 8 3 1 00 Office Equipment 9 8 2 5 00 Store Equipment 5 2 0 0 00 Accounts Payable Fed. Corp. Inc. Tax Payable Employees’ Fed. Inc. Tax Pay. Employees’ State Inc. Tax Pay. Social Security Tax Payable Medicare Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Capital Stock Retained Earnings Income Summary Sales Sales Discounts 7 3 0 00 Sales Returns and Allowances 2 0 0 0 00 Purchases 206 7 0 0 00 Transportation In 4 0 3 6 18 Purchases Discounts Purchases Returns and Allowances Advertising Expense 2 4 5 0 00 Bankcard Fees Expense 4 1 9 9 27 Fed. Corp. Income Tax Expense 9 8 4 0 00 Insurance Expense Maintenance Expense 3 5 1 9 25 Miscellaneous Expense 3 4 8 28 Payroll Tax Expense 3 8 2 6 83 Rent Expense 14 0 0 0 00 Salaries Expense 29 3 7 4 60 Supplies Expense Utilities Expense 2 3 6 4 87 435 7 9 8 28 Net Income

ADJUSTMENTS

CREDIT

CREDIT

DEBIT

(a) 3 5 3 6 00 (b) 3 7 1 0 00 (c)

1 2 5 00

(d)

1 5 5 00

13 8 5 0 00 6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19 (a) 3 5 3 6 00

320 4 5 0 00

1 3 4 0 00 1 8 0 0 00

(d) (c)

1 5 5 00 1 2 5 00

(b) 3 7 1 0 00

435 7 9 8 28

7 5 2 6 00

7 5 2 6 00

41 42 43

Writing this heading eliminates the need for an explanation to be written after each adjusting entry. The following entries are recorded in the Adjustments columns of the work sheet:

532

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 532

9/14/05 5:52:10 PM

Athletic Wear Sheet December 31, 20-ADJUSTED TRIAL BALANCE DEBIT

15 10 81 1 1 19 9 5

CREDIT

INCOME STATEMENT DEBIT

CREDIT

1 7 9 00 4 0 4 00 3 8 5 00 8 3 9 00 3 7 5 00 8 3 1 00 8 2 5 00 2 0 0 00

BALANCE SHEET DEBIT

15 10 81 1 1 19 9 5 13 8 5 0 00 1 5 5 00 6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19

3 5 3 6 00

CREDIT

1 7 9 00 4 0 4 00 3 8 5 00 8 3 9 00 3 7 5 00 8 3 1 00 8 2 5 00 2 0 0 00

1 2 3 4 5 6 7 8

13 8 5 0 00 1 5 5 00 6 4 0 00 8 0 00 2 4 8 00 5 8 00 1 8 36 1 1 4 73 2 4 2 8 00 75 0 0 0 00 19 7 7 1 19 3 5 3 6 00

320 4 5 0 00 7 3 0 00 2 0 0 0 00 206 7 0 0 00 4 0 3 6 18

11 12 13 14 15 16 17 18 19 20

320 4 5 0 00 7 3 0 00 2 0 0 0 00 206 7 0 0 00 4 0 3 6 18

1 3 4 0 00 1 8 0 0 00

9 10

21 22 23 24 25

1 3 4 0 00 1 8 0 0 00

2 4 5 0 00 2 4 5 0 00 4 1 9 9 27 4 1 9 9 27 9 9 9 5 00 9 9 9 5 00 1 2 5 00 1 2 5 00 3 5 1 9 25 3 5 1 9 25 3 4 8 28 3 4 8 28 3 8 2 6 83 3 8 2 6 83 14 0 0 0 00 14 0 0 0 00 29 3 7 4 60 29 3 7 4 60 3 7 1 0 00 3 7 1 0 00 2 3 6 4 87 2 3 6 4 87 435 9 5 3 28 435 9 5 3 28 290 9 1 5 28 323 5 9 0 00 145 0 3 8 00 112 3 6 3 28 32 6 7 4 72 32 6 7 4 72 323 5 9 0 00 323 5 9 0 00 145 0 3 8 00 145 0 3 8 00

26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

(a) (b) (c) (d)

Figure 18–5 On Your Mark Athletic Wear Completed Work Sheet (continued)

adjusting merchandise inventory adjusting supplies adjusting insurance adjusting income tax

Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries

516-549_CH18_868829.indd 533

533

9/14/05 5:52:13 PM

GENERAL JOURNAL DATE 1 2

20-Dec.

DESCRIPTION

31

3 4

31

5 6

31

7 8 9

31

Adjusting Entries Income Summary Merchandise Inventory Supplies Expense Supplies Insurance Expense Prepaid Insurance Fed. Corporate Income Tax Exp. Fed. Corp. Income Tax Pay.

POST. REF.

PAGE DEBIT

22

CREDIT 1

3 5 3 6 00

2

3 5 3 6 00 3 7 1 0 00

4

3 7 1 0 00 1 2 5 00

5 6

1 2 5 00 1 5 5 00

10

3

7 8

1 5 5 00

9 10

Figure 18–6 Recording Adjusting Entries in the General Journal The first adjustment, which was labeled (a) on the work sheet, is recorded in the general journal in Figure 18–6 as a debit to Income Summary for $3,536 and a credit to Merchandise Inventory for $3,536. The label (a) is not recorded in the general journal. Remaining adjustments are entered in the general journal in the same manner, with the debit part of the entry recorded first. The date for each adjusting entry is the last day of the period.

Posting Adjusting Entries to the General Ledger After the adjusting entries have been recorded in the general journal, the accountant posts them to the general ledger accounts. Once the adjusting entries have been posted, the general ledger accounts are up to date. The balances in the general ledger accounts all agree with the amounts entered on the Income Statement and Balance Sheet sections of the work sheet. Posting these entries accomplishes the following: • • • • • • • •

534

The Supplies Expense account has been “charged” with the value of the supplies used in the period. The Supplies account reflects only the amount of items still remaining in inventory. The Merchandise Inventory account reflects the correct inventory value. The Income Summary account has been “charged” with the cost of goods sold for the period. The Insurance Expense account reflects the appropriate insurance expense for the period. The Prepaid Insurance account has been reduced by the amount of insurance expired. The Federal Corporate Income Tax Payable account has been increased to reflect the appropriate payable amount. The Federal Corporate Income Tax Expense account reflects the tax expense for the period.

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 534

9/14/05 5:52:15 PM

Figure 18–7 shows the general journal and the general ledger accounts after the posting of the adjusting entries has been completed. Notice that the words Adjusting Entry have been written in the Description column of the general ledger accounts.

GENERAL JOURNAL DATE 1 2

20-Dec.

3 4 5 6 7 8 9

POST. REF.

DESCRIPTION

Adjusting Entries 31 Income Summary Merchandise Inventory Supplies Expense Supplies Insurance Expense Prepaid Insurance Fed. Corporate Income Tax Exp. Fed. Corp. Income Tax Pay.

22

PAGE DEBIT

CREDIT 1

3 5 3 6 00

310 125 670 130 635 135 630 204

2

3 5 3 6 00

3

3 7 1 0 00

4

3 7 1 0 00

5

1 2 5 00

6

1 2 5 00

7

1 5 5 00

8

1 5 5 00

9

10

10

11

11

ACCOUNT Merchandise Inventory DATE

20-Jan. Dec.

DESCRIPTION

1 Balance 31 Adjusting Entry

ACCOUNT NO. 125 BALANCE

POST. REF.

DEBIT

CREDIT

✓ G22

DEBIT

84 9 2 1 00 81 3 8 5 00

3 5 3 6 00

ACCOUNT Supplies DATE

20-Dec.

ACCOUNT NO. 130

DESCRIPTION

1 Balance 15 31 Adjusting Entry

BALANCE

POST. REF.

DEBIT

✓ P12 G22

2 5 0 00

CREDIT

DEBIT

3 7 1 0 00

20-Dec.

DESCRIPTION

17 31 Adjusting Entry

CREDIT

5 2 9 9 00 5 5 4 9 00 1 8 3 9 00

ACCOUNT Prepaid Insurance DATE

CREDIT

ACCOUNT NO. 135 POST. REF.

CP14 G22

BALANCE DEBIT

CREDIT

1 5 0 0 00 1 2 5 00

DEBIT

CREDIT

1 5 0 0 00 1 3 7 5 00

Figure 18–7 Adjusting Entries Posted to the General Ledger

Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries

516-549_CH18_868829.indd 535

535

4/6/06 6:16:33 PM

ACCOUNT Federal Corporate Income Tax Payable DATE

20-Dec.

DESCRIPTION

BALANCE

POST. REF.

31 Adjusting Entry

ACCOUNT NO. 204

DEBIT

CREDIT

G22

DEBIT

CREDIT

1 5 5 00

1 5 5 00

ACCOUNT Income Summary DATE

20-Dec.

DESCRIPTION

31 Adjusting Entry

ACCOUNT NO. 310 BALANCE

POST. REF.

DEBIT

G22

CREDIT

DEBIT

3 5 3 6 00

CREDIT

3 5 3 6 00

ACCOUNT Federal Corporate Income Tax Expense DATE

20-Dec.

DESCRIPTION

1 Balance 31 Adjusting Entry

ACCOUNT NO. 630 BALANCE

POST. REF.

DEBIT

✓ G22

1 5 5 00

CREDIT

DEBIT

9 8 4 0 00 9 9 9 5 00

ACCOUNT Insurance Expense DATE

20-Dec.

DESCRIPTION

31 Adjusting Entry

ACCOUNT NO. 635 BALANCE

POST. REF.

DEBIT

G22

1 2 5 00

CREDIT

20-Dec.

DESCRIPTION

31 Adjusting Entry

DEBIT

CREDIT

1 2 5 00

ACCOUNT Supplies Expense DATE

CREDIT

ACCOUNT NO. 670 POST. REF.

G22

BALANCE DEBIT

3 7 1 0 00

CREDIT

DEBIT

CREDIT

3 7 1 0 00

Figure 18–7 Adjusting Entries Posted to the General Ledger (continued)

536

Chapter 18 Adjustments and the Ten-Column Work Sheet

516-549_CH18_868829.indd 536

4/6/06 6:16:34 PM

Assessment

SECTION 3 AFTER YOU

READ

Reinforce the Main Idea Use a diagram like this one to describe the process of updating the general ledger accounts.

5PDATINGTHE'ENERAL,EDGER!CCOUNTS

Do the Math The following column totals appear in the Balance Sheet section of the work sheet for Tonya’s Toys on December 31. Debit column Credit column

$317,290 $323,730

Calculate the net income or net loss for the period.

Problem 18–3 Analyzing the Work Sheet Refer to Figure 18–5 and answer the following questions in your working papers: 1. What amount is extended to the Income Statement section for Federal Corporate Income Tax Expense? 2. To which section of the work sheet is the balance of Prepaid Insurance extended? 3. What is the total amount of supplies consumed during the period? 4. What is the total amount still owed to the federal government for corporate income tax?

Problem 18–4 Analyzing a Source Document Answer these questions, based on the debit memorandum shown here. 1. Which company is returning the merchandise? 2. How many items are being returned? 3. What amount is entered in the journal entry? 4. Which account is debited? 5. Which account is credited?

DEBIT MEMORANDUM

No. 284 Date:

Invoice No.:

ROTARY SUPPLY CORPORATION

May 4, 20-378456

634 West Washington Avenue, Lincoln, SC 30856

To:

K & L Electrical 845 Morgan Street Plantsville, SC 30455

Quantity

4 2

This day we have debited your account as follows: Item

Unit Price

Locking Fixture #27304-78 Mirror/Reflectors #8935-231

$ 36.95 11.24 Subtotal Tax Total

Total

$ 147.80 22.48 $ 170.28 6.81 $ 177.09

Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries

516-549_CH18_868829.indd 537

537

9/14/05 5:52:24 PM

Summary

CH A P T ER 18 Key Concepts

1. The ten-column work sheet contains Debit and Credit columns for these five sections: • Trial Balance—includes all general ledger accounts, even those with zero balances. • Adjustments—records the adjustments made at the end of the period to bring various account balances up to date. • Adjusted Trial Balance—shows the updated balances of all general ledger accounts. • Income Statement—contains the balances of all temporary accounts, including Income Summary and revenue, cost of merchandise, and expense accounts. • Balance Sheet—contains the balances of all permanent accounts, including assets, liabilities, and stockholders’ equity. 2. To prepare the Trial Balance section, enter the number and name of each account in the general ledger in the appropriate columns in the order that they appear in the general ledger: • • • • • •

Asset Liability Stockholders’ Equity Revenue Cost of Merchandise Expense

An adjustment is an amount that is added to or subtracted from an account balance to bring that balance up to date. • Adjustments reflect changes in account balances caused by the internal operations of the business or the passage of time. • Adjustments are made to match revenue with the expenses incurred to earn it. • Every adjustment affects one permanent and one temporary general ledger account. • Adjustments are recorded in the Adjustments section of the work sheet. 3. A general ledger account needs to be adjusted if the balance shown is not up to date as of the last day of the period. 4. Common adjusting entries and the information needed to calculate them: Adjustment

538

Information Needed

Merchandise Inventory

• Merchandise Inventory account balance • Physical inventory amount

Supplies

• Supplies account balance • Cost of supplies on hand

Prepaid Insurance

• Expired portion of insurance coverage

Federal Corporate Income Tax

• Federal Corporate Income Tax Expense account balance (estimated quarterly payments) • Federal corporate income tax based on exact income

Chapter 18 Summary

516-549_CH18_868829.indd 538

9/14/05 5:52:27 PM

Summary

CHAPT E R 1 8

5. A work sheet is prepared • to organize all of the data needed to update the accounts • to prepare the financial statements • to record end-of-period adjusting entries and closing entries The completed work sheet lists all general ledger accounts and their updated balances and shows the net income (or net loss) for the period. To prepare a ten-column work sheet: • Complete the Trial Balance section. Enter the account numbers, names and balances for all general ledger accounts. Total, prove, and rule the section. • Calculate the adjustments needed and enter them in the Adjustments section. • Complete the Adjusted Trial Balance section. For each account, combine the Trial Balance section amount with the Adjustment section amount and enter the total in the Adjusted Trial Balance section. • Add debits to debits • Add credits to credits • Subtract debits and credits • Total, prove, and rule the Adjustments and Adjusted Trial Balance sections. • Extend the amounts in the Adjusted Trial Balance section to the appropriate columns in the Balance Sheet and Income Statement sections. • Complete the work sheet. Calculate the net income (or net loss) and enter it in the appropriate columns in the Income Statement and Balance Sheet sections. Total, prove, and rule the Income Statement and Balance Sheet sections. 6. The adjustments entered on the work sheet must be recorded in the general journal. The source of information for journalizing adjustments is the Adjustments section of the work sheet. Adjusting Entries is written in the Description column immediately above the first adjusting entry, eliminating the need to write an explanation after each entry. The debit part of the entry is recorded first. The date for each adjusting entry is the last day of the period.

Key Terms adjusting entries

(p. 531)

ending inventory

(p. 521)

adjustment

(p. 520)

physical inventory

(p. 521)

beginning inventory

(p. 521)

prepaid expense

(p. 525)

Chapter 18 Summary

516-549_CH18_868829.indd 539

539

9/14/05 5:52:29 PM

C H A P T ER 18 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Components of the Ten-Column Work Sheet a. What are the five sections of the ten-column work sheet? b. What sections does the ten-column work sheet contain that the six-column work sheet does not? Trial Balance and Period-End Adjustments a. What is the purpose of preparing a trial balance? b. What is an adjustment? Adjusted General Ledger Accounts a. Why must some general ledger accounts be updated at the end of the period? b. What is the step to follow after adjusting entries have been recorded in the general journal? Adjustment Calculation a. How is the amount of merchandise on hand determined at the end of a period? b. After the physical inventory is taken, what happens to the Merchandise Inventory account? Completion of the Ten-Column Work Sheet a. Which accounts are included on the Balance Sheet section of the work sheet? b. Which accounts are included on the Income Statement section of the work sheet? Adjustments a. What is an adjusting entry? b. What is the source of information for journalizing adjusting entries?

Apply Key Terms As the accounting manager for several Homemade Fresh Ice Cream stores in your region, you oversee the preparation of endof-period financial statements. Before you complete your end-of-period reports, you need your staff to verify their work sheets and trial balances. Write a memorandum to the staff to remind them to verify their data, make adjustments where needed, give beginning and ending inventory figures, and complete a physical inventory. In the body of your memorandum, provide a brief definition of each term. adjusting entries adjustment beginning inventory

540

ending inventory physical inventory prepaid expense

Chapter 18 Review and Activities

516-549_CH18_868829.indd 540

9/14/05 5:52:31 PM

Computerized Accounting

CHAPT E R 1 8

Adjusting Entries Making the Transition from a Manual to a Computerized System Task

Manual Methods

Recording adjusting entries

• From the general ledger, prepare a trial balance in the first two columns of a work sheet. • Record adjustments on the work sheet. • Calculate adjusted account balances in the Adjusted Trial Balance columns. • Extend account balances to Income Statement or Balance Sheet columns in the work sheet. • Calculate net income (loss) for the accounting period. • Record adjusting entries in the general journal. • Post adjusting entries to general ledger accounts.

Computerized Methods • Print a Trial Balance. • Record the adjusting entries in the general journal. • General ledger accounts are automatically updated.

Q&A Peachtree Question

Answer

How do I generate a trial balance for use in preparing adjustments?

1. From the Reports menu, select General Ledger. 2. From the Report list, select Working Trial Balance. 3. Click the Print button.

How do I journalize the adjusting entries?

1. 2. 3. 4.

List necessary adjustments on the Working Trial Balance form. From the Tasks menu, select General Journal Entry. Enter the adjusting entries. Click Save.

QuickBooks Q & A QuickBooks Question

Answer

How do I generate a trial balance for use in preparing adjustments?

1. From the Reports menu, select Accountant & Taxes. 2. From the Accountant & Taxes submenu, select Trial Balance. 3. Click the Print button.

How do I journalize the adjusting entries?

1. 2. 3. 4.

Use the Trial Balance to help you prepare the adjusting entries. From the Company menu, select Make General Journal Entries. Enter the adjusting entries. Click Save & Close.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 18 Computerized Accounting

516-549_CH18_868829.indd 541

541

9/14/05 5:52:38 PM

Problems

C H A P T ER 18 Complete problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 18–5 1. Select the spreadsheet template for Problem 18–5. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 18–5 Completing a Ten-Column Work Sheet The August 31 trial balance for InBeat CD Shop is entered on the work sheet in your working papers. Listed below is the data needed to make the adjustments.

Instructions In your working papers, complete the ten-column work sheet for InBeat CD Shop for the month ended August 31. Data for Adjustments Merchandise Inventory, August 31

$ 77,872

Supplies consumed during the period

2,171

Insurance premium expired during the period

489

Additional federal corporate income taxes owed

118

Analyze

After the adjustments are entered on the work sheet, assess which expense account has the highest balance.

Problem 18–6 Completing a Ten-Column Work Sheet The August 31 trial balance for Shutterbug Cameras is listed on the next page. Also listed is the data needed for the adjustments.

Instructions In your working papers, complete the ten-column work sheet for Shutterbug Cameras for the month ended August 31.

542

Chapter 18 Problems

516-549_CH18_868829.indd 542

9/14/05 5:52:40 PM

Problems Trial Balance Debit Credit 101 Cash in Bank $13,873 115 Accounts Receivable 5,382 125 Merchandise Inventory 82,981 130 Supplies 2,397 135 Prepaid Insurance 1,350 140 Store Equipment 30,769 201 Accounts Payable $ 8,481 207 Federal Corporate Income Tax Payable — 210 Employees’ Federal Income Tax Payable 194 211 Employees’ State Income Tax Payable 48 212 Social Security Tax Payable 119 213 Medicare Tax Payable 25 215 Sales Tax Payable 381 216 Federal Unemployment Tax Payable 19 217 State Unemployment Tax Payable 92 301 Capital Stock 80,000 305 Retained Earnings 28,568 310 Income Summary — — 401 Sales 95,487 405 Sales Discounts 37 410 Sales Returns and Allowances 945 501 Purchases 39,491 505 Transportation In 2,039 510 Purchases Discounts 656 515 Purchases Returns and Allowances 219 601 Advertising Expense 128 605 Bankcard Fees Expense 219 620 Federal Corporate Income Tax Expense 1,580 630 Insurance Expense — 640 Maintenance Expense 2,513 645 Miscellaneous Expense 652 647 Payroll Tax Expense 1,953 650 Rent Expense 9,000 655 Salaries Expense 18,631 660 Supplies Expense — 670 Utilities Expense 349 Data for Adjustments Merchandise Inventory, August 31 $78,672 Supplies on hand, August 31 389 Insurance premium expired during the period 490 Additional federal income taxes owed 252

Analyze

CHAPT E R 1 8 SMART GUIDE Step–by–Step Instructions: Problem 18–6 1. Select the problem set for Shutterbug Cameras (Prob. 18–6). 2. Rename the company and set the system date. 3. Print a Working Trial Balance and use it to help you prepare the adjustments. 4. Record the adjustments using the General Journal Entry option. 5. Print a General Journal report and proof your work. 6. Print a General Ledger Trial Balance report. 7. Complete the Analyze activity. 8. End the session.

TIP: Use the Inventory Adjustment account, not the Income Summary account, to record the adjustment for Merchandise Inventory.

Identify which account in the Balance Sheet section, Accounts Payable or Accounts Receivable, has the higher balance. Chapter 18 Problems

516-549_CH18_868829.indd 543

543

9/14/05 5:52:42 PM

Problems

C H A P T ER 18

Problem 18–7 Completing a Ten-Column Work Sheet SMART GUIDE Step–by–Step Instructions: Problem 18–7 1. Select the problem set for Cycle Tech Bicycles (Prob. 18–7). 2. Rename the company and set the system date. 3. Print a Working Trial Balance and use it to help you prepare the adjustments. 4. Record the adjustments using the General Journal Entry option. 5. Print a General Journal report and proof your work. 6. Print a General Ledger Trial Balance report. 7. Complete the Analyze activity. 8. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 18–7 1. Restore the Problem 18-7.QBB file. 2. Print a Trial Balance and use it to help you prepare the adjustments. 3. Record the adjustments using the Make General Journal Entries option. 4. Print a Journal report and proof your work. 5. Print a Trial Balance. 6. Complete the Analyze activity. 7. Back up your work.

544

The balances of the general ledger accounts of Cycle Tech Bicycles, as of August 31, are listed below. Also listed is the data needed for the adjustments.

Instructions In your working papers: Prepare a ten-column work sheet for Cycle Tech Bicycles for the month ended August 31. 101 115 125 130 135 140 145 201 210 211 212 213 214 215 216 217 301 305 310 401 405 410 501 505 510 515 601 605 625 630 645 650 655 657 660 665 675

Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Store Equipment Office Equipment Accounts Payable Federal Corporate Income Tax Payable Employees’ Federal Income Tax Payable Employees’ State Income Tax Payable Social Security Tax Payable Medicare Tax Payable Sales Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Capital Stock Retained Earnings Income Summary Sales Sales Discounts Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Returns and Allowances Advertising Expense Bankcard Fees Expense Federal Corporate Income Tax Expense Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense

$ 22,323 1,737 23,654 3,971 1,800 25,395 15,239 11,051 — 519 142 408 137 1,871 51 263 40,000 14,908 — 128,231 214 1,289 67,118 1,172 810 322 2,938 185 3,650 — 2,450 3,929 834 10,750 4,670 — 5,395

Chapter 18 Problems

516-549_CH18_868829.indd 544

9/14/05 5:52:43 PM

Problems Data for Adjustments Ending merchandise inventory Ending supplies inventory Insurance premium expired Federal income tax expense for the month

Analyze

$ 24,188 1,049 675 3,827

Determine which section of the work sheet, the Trial Balance section or the Balance Sheet section, had the higher balance for Merchandise Inventory.

Problem 18–8 Completing a Ten-Column Work Sheet The balances of the general ledger accounts of River’s Edge Canoe & Kayak, as of August 31, are listed below.

Instructions In your working papers: 1. Prepare a ten-column work sheet for River’s Edge Canoe & Kayak for the month ended August 31. The account names are entered on the work sheet. The data for the adjustments follows: (a) The cost of the ending merchandise inventory is $45,669. (b) The cost of the supplies on hand on August 31 is $619. (c) The one-year insurance premium of $1,680 was paid on April 1. (d) The total federal income taxes owed for the year are $2,635. 2. Enter the journal entries for the adjustments on page 31 of the general journal. 3. Post the journal entries to the general ledger accounts. 101 Cash in Bank $ 15,387 115 Accounts Receivable 2,852 130 Merchandise Inventory 49,205 135 Supplies 3,027 140 Prepaid Insurance 1,680 145 Delivery Equipment 19,437 150 Store Equipment 29,504 201 Accounts Payable 13,339 204 Federal Corporate Income Tax Payable — 210 Employees’ Federal Income Tax Payable 632 211 Employees’ State Income Tax Payable 117 212 Social Security Tax Payable 472 213 Medicare Tax Payable 108 215 Sales Tax Payable 2,931 216 Federal Unemployment Tax Payable 77 217 State Unemployment Tax Payable 315 219 U.S. Savings Bonds Payable 150 301 Capital Stock 50,000 305 Retained Earnings 25,425 310 Income Summary —

CHAPT E R 1 8 SMART GUIDE Step–by–Step Instructions: Problem 18–8 1. Select the problem set for River’s Edge Canoe & Kayak (Prob. 18–8). 2. Rename the company and set the system date. 3. Print a Working Trial Balance and use it to help you prepare the adjustments. 4. Record the adjustments using the General Journal Entry option. 5. Print a General Journal report and proof your work. 6. Print a General Ledger report. 7. Print a General Ledger Trial Balance report. 8. Complete the Analyze activity. 9. End the session.

TIP: Enter the adjustments as one multipart entry to save time.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 18–8 1. Restore the Problem 18-8.QBB file. 2. Print a Trial Balance and use it to help you prepare the adjustments. 3. Record the adjustments using the Make General Journal Entries option. 4. Print a Journal report and proof your work. 5. Print a General Ledger report. 6. Print a Trial Balance report. 7. Complete the Analyze activity. 8. Back up your work.

CONTINUE

Chapter 18 Problems

516-549_CH18_868829.indd 545

545

9/14/05 5:52:45 PM

Problems

C H A P T ER 18 401 405 410 501 505 510 515 601 605 625 635 650 655 658 660 665 670 680

Sales Sales Discounts Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Returns and Allowances Advertising Expense Bankcard Fees Expense Federal Corporate Income Tax Expense Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense

Analyze

CHALLENGE PROBLEM

144,945 203 1,381 79,310 1,192 1,292 576 3,151 288 2,480 — 1,381 3,772 1,219 10,350 11,965 — 2,595

Calculate River’s Edge net income (net loss) if it had not taken any purchases discounts for paying creditors within the discount period.

Problem 18–9 Locating Errors on the Work Sheet

The Trial Balance and adjustment sections for Buzz Newsstand have been prepared in your working papers. It is apparent from the totals on the work sheet that errors have been made in preparing these portions of the work sheet. The accounting records show: 1. The merchandise on hand at the end of the month is valued at $12,950. 2. The supplies on hand on August 31 are valued at $529. 3. The insurance premium was paid on August 1. The premium was $980 and covers the period from August 1 to November 30. 4. The total federal income tax owed for the period is $249.

Instructions In your working papers: 1. Find and correct the error(s) in the Trial Balance section. 2. On the line provided on the work sheet, write in the corrected totals for the Trial Balance section. 3. Find and correct the error(s) in the Adjustments section. 4. Write in the corrected totals for the Adjustments columns.

Analyze

546

Explain your calculations for the Merchandise Inventory adjustment.

Chapter 18 Problems

516-549_CH18_868829.indd 546

4/6/06 6:16:52 PM

Winning Competitive Events

CHAPT E R 1 8

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Which of the following statements is incorrect concerning an adjusted trial balance? a. An adjusted trial balance lists account balances and their locations in the ledger. b. An adjusted trial balance shows proper balance sheet and income statement amounts. c. An adjusted trial balance is prepared before the adjusting entries have been journalized and posted. d. An adjusted trial balance can be used to prepare the financial statements. e. All of the above are true statements. 2. A store purchased a one-year insurance policy for $1,800 on September 1. Its fiscal period ended December 31. What is the amount of the adjustment and what accounts are debited and credited on December 31? a. $1,800; insurance expense and prepaid insurance b. $600; insurance expense and prepaid insurance c. $1,200; insurance expense and prepaid insurance d. $600; prepaid insurance and insurance expense 3. The Income Summary amount in a work sheet’s Adjustments Debit column represents the a. decrease in Merchandise Inventory. b. increase in Merchandise Inventory. c. beginning Merchandise Inventory. d. ending Merchandise Inventory.

Business Professionals of America MULTIPLE CHOICE 4. The ending balance of the Supplies account appears a. in the Trial Balance columns of the work sheet. b. in the Balance Sheet columns of the work sheet. c. in the Income Statement columns of the work sheet. d. on the statement of changes in owner’s equity. 5. What entries are recorded at the Need More Help? end of the fiscal period to update Go to glencoeaccounting.glencoe.com and general ledger accounts? click on Student Center. Click on Winning a. Closing Competitive Events and select Chapter 18. b. Adjusting • Practice Questions and Test-Taking Tips c. Post-closing • Concept Capsules and Terminology d. Reversing glencoeaccounting.glencoe.com

516-549_CH18_868829.indd 547

Chapter 18 Winning Competitive Events

547

4/6/06 6:16:53 PM

C H A P T ER 18

Real-World Applications and Connections

Critical Thinking

Adjustments and the Ten-Column Work Sheet

CASE

Merchandising Business: Training Videos

STUDY

1. What is the term for the actual counting of merchandise on hand and available for sale at the end of the fiscal period? 2. Explain what expensing an asset means. 3. Compute the adjustment for Supplies if the business had $3,000 in supplies at the beginning of the period, bought $4,000 during the period, and estimated that it had used 60% of all supplies during the period. 4. Compare the Federal Corporate Income Tax Expense account with the Federal Corporate Income Tax Payable account. How are they different? 5. Explain where you could obtain the information needed to determine the amount of the insurance adjustment in the work sheet’s Adjustments section. 6. Defend the concept that businesses cannot track supplies as they are used. You are an accountant for EZ Training Systems. The company CEO has asked you to prepare financial statements without the appropriate adjusting entries. INSTRUCTIONS Analyze this information for adjustments and complete the tasks. Beginning Ending Supplies Prepaid Insurance

a mattoefr

))

$1,200 800

1. Net income before adjustments is $22,400. Calculate net income after the adjustments have been made. 2. Explain why the financial statements do not present an accurate picture of the company without considering the adjusting entries.

ETHICS

$ )) Communicating ACCOUNTING

548

$5,000 6,400

Out-of-Date Goods The local bakery where you work as an accounting clerk does not sell its day-old baked goods but allows employees to have them. One day a mother with three children who cannot afford fresh donuts asks to buy some day-old ones. You consider giving her several that are about to be thrown away. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Training New Employees You are preparing a presentation for the board of directors of Kids-n-Teens. As you review the quarterly financial statements, you see that the new clerk extended the account balances from the Adjusted Trial Balance section to the Balance Sheet section but not to the Income Statement section. Select a classmate and practice an explanation of how to extend to both sections.

Chapter 18 Real-World Applications and Connections

516-549_CH18_868829.indd 548

4/6/06 6:16:54 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Leadership You have just been promoted to Accounting Director for a national toy store chain. In reviewing the end-of-period financial reports, you see that net income was lower than in past periods. You believe a new line of toys could boost net income for the next period. Lee Rainwater, the Marketing Director, has been with the company for 25 years, and his decisions are rarely questioned. INSTRUCTIONS Explain how you would approach Lee to discuss adding a new toy line.

Accounting for Inflation If your money does not go as far as it used to, the cause is probably inflation. When there is a general increase in the cost of goods and services, inflation exists. Countries use different methods of accounting for inflation. INSTRUCTIONS Explain why investors should know how inflation accounting is handled when reviewing financial statements.

Your Household Supplies Your family probably handles its kitchen supplies the way a business handles its supplies. That is, a family member buys them as needed. No one tracks them. When the supply gets low, someone decides to buy more. PERSONAL FINANCE ACTIVITY List supplies a family might purchase weekly, monthly, and once or twice a year. Identify the group with the most items and methods to determine when to reorder items. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 18.

Classifying the Balance Sheet—Assets and Liabilities Accounts on the balance sheet are classified or grouped into related categories. These classifications provide subtotals which can be used to compute ratios and do comparisons. For example any portion of a long-term liability that is due within the next year is classified as a current liability. This affects the company’s liquidity ratios and working capital. (See pages 235–236 in Chapter 9.) INSTRUCTIONS Use PETsMART’s balance sheet in Online Business Appendix F to answer these questions. Transactions 1. What is the working capital as of Online transactions usually February 1, 2004? update general ledger 2. Obtain PETsMART’s most recent annual accounts automatically. Visit report from the Internet or library. What glencoeaccounting is the working capital as of the balance .glencoe.com and click on Student Center. Click on sheet date? WebQuest and select Unit 4 to 3. Describe any change from the fiscal year continue your Internet project. ending February 1, 2004.

glencoeaccounting.glencoe.com

516-549_CH18_868829.indd 549

CHAPT E R 1 8

Chapter 18 Real-World Applications and Connections

549

9/14/05 5:52:54 PM

CH A P T ER 19

Financial Statements for a Corporation BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain how to record ownership of a corporation.

2.

Explain the relationship between the work sheet and the financial statements for a merchandising corporation.

1. 2. 3. 4.

3.

Explain how a corporation’s financial statements differ from a sole proprietorship’s.

4.

5. 6.

Prepare an income statement, statement of retained earnings, and balance sheet, and describe the statement of cash flows for a merchandising corporation.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING CORPORATE FINANCIAL STATEMENTS

99 Cents Only Stores Do you think it is possible to buy a new 19-inch color TV for 99 cents? It was for the first nine customers at a recent grand opening of a 99 Cents Only Store. Promoting its 223rd store, 99 Cents Only Stores tempted customers with all kinds

Analyze the financial data contained on the statements.

of bargains for 99 cents or less: name-brand and private-

Define the accounting terms introduced in this chapter.

household goods.

Why It’s Important

company a profit? This retailer focuses on close-out inventory

▲

The corporate form of business and the merchandising operation both have unique financial reporting requirements.

label foods, beverages, health and beauty products, toys, and How can selling products at such a low price make the and distressed products purchased at discount prices. The financial condition and performance of 99 Cents Only Stores can be examined using statements like the balance sheet and income statement and accompanying notes. Companies also publish growth trends, expansion plans, and financial milestones.

What Do You Think? In purchasing stock in a company like 99 Cents Only Stores, what would you review on its financial statements?

550

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 550

9/15/05 11:48:15 AM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Once the work sheet has been completed, the accounting staff is ready to prepare financial statements. Many corporations are required by law to disclose their financial information to the public. If you have listened to the evening news on television, you might remember an announcer reporting earnings increases or decreases for a large national corporation. This information is found in the financial statements or annual reports of the company.

glencoeaccounting.glencoe.com

550-581_CH19_868829.indd 551

Personal Connection 1. Is your employer a public corporation? 2. Are the financial statements available for you to review? 3. Can they be found on the Internet or in your local library?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 19.

551

9/15/05 11:48:21 AM

SECTION 1

BEFORE YOU

READ

Main Idea

Owners’ equity in a corporation is called stockholders’ equity.

Read to Learn… ➤ the accounts used to

record ownership of a corporation. (p. 552) ➤ the qualities expected in financial statements. (p. 554) ➤ the financial statements of a corporation. (p. 555)

Key Terms

Capital Stock stockholders’ equity retained earnings comparability reliability relevance full disclosure materiality

The Ownership of a Corporation In Chapter 18 you learned that the work sheet organizes data for preparing financial statements and end-of-period journal entries. In this chapter you will use it to prepare financial statements for a merchandising corporation. This is an important task for all businesses.

Accounting for a Corporation Who Owns a Corporation? One person owns a sole proprietorship. A corporation may be owned by one person or by thousands of people. The ownership of a corporation is represented by shares of stock.

Recording the Ownership of a Corporation As you recall, investments by the owner of a sole proprietorship are recorded in the owner’s capital account. A $25,000 owner’s investment in a sole proprietorship is recorded as shown in the T accounts. Cash in Bank is debited for $25,000, and Maria Sanchez, Capital is credited for $25,000. Cash in Bank Debit  25,000

Credit


Maria Sanchez, Capital Debit


Credit  25,000

Businesses organized as corporations have a Capital Stock account instead of the owner’s capital account in a sole proprietorship. Capital Stock represents investments in the corporation by its stockholders (owners). Capital Stock is classified as a stockholders’ equity account. Stockholders’ equity is the value of the stockholders’ claims to the corporation. Like the owner’s capital account in a sole proprietorship, increases to Capital Stock are recorded as credits and decreases are recorded as debits.

Reporting Stockholders’ Equity in a Corporation The form of business organization does not affect the amount of equity in the business. That is, one person may have an ownership interest in a

552

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 552

9/15/05 11:48:36 AM

B u s i n e s s Tr a n s a c t i o n On January 1 stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. ANALYSIS

Identify Classify
/

1. The accounts affected are Cash in Bank and Capital Stock. 2. Cash in Bank is an asset account. Capital Stock is a stockholders’ equity account. 3. Cash in Bank is increased by $25,000. Capital Stock is increased by $25,000.

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5. Increases to stockholders’ equity accounts are recorded as credits. Credit Capital Stock for $25,000.

T ACCOUNTS

6.

Cash in Bank Credit


Debit  25,000

JOURNAL ENTRY

Capital Stock Credit  25,000

Debit


7. GENERAL JOURNAL DATE 1 2 3 4

20-Jan.

DESCRIPTION

POST. REF.

PAGE DEBIT

1

CREDIT 1

1 Cash in Bank Capital Stock Receipt 997

2 5 0 0 0 00

2

25 0 0 0 00

3 4

sole proprietorship worth $80,000, or 10 people may have shares of stock in a corporation worth a total of $80,000. The difference is in the way these two amounts are reported on the balance sheet. A sole proprietorship reports the balance of the owner’s capital account in the owner’s equity section of the balance sheet. For a corporation the owner’s equity section of the balance sheet is called stockholders’ equity. The law requires that stockholders’ equity be reported in two parts: (1) equity contributed by stockholders and (2) equity earned through business profits.

Equity Contributed by Stockholders The first part of stockholders’ equity is the amount of money invested by stockholders. This amount is comparable to the investments made by the owner in a sole proprietorship. In a corporation stockholders contribute to equity by buying shares of stock issued by the corporation. Stockholders’ investments are recorded in the Capital Stock account.

Section 1 The Ownership of a Corporation

550-581_CH19_868829.indd 553

553

9/15/05 11:48:56 AM

Equity Earned Through Business Profits The second part of stockholders’ equity is the amount of accumulated net income earned and retained by the corporation. This amount is comparable to the amount of net income less any withdrawals by the owner in a sole proprietorship. In a corporation this amount, called retained earnings , represents the increase in stockholders’ equity from the portion of net income not distributed to the stockholders. Earnings retained by a corporation are recorded in the Retained Retained Earnings Earnings account. Retained Earnings is classified as a stockholders’ Credit Debit equity account. Like the Capital Stock account, it is increased by cred
Increase Side Decrease Side its and decreased by debits. Retained Earnings has a normal credit Normal Balance balance. In a sole proprietorship, net income increases owner’s capital. This increase in owner’s capital represents an increase in the assets of the business. In a corporation net income increases retained earnings, which represents the growth, or increase, in the assets of the corporation.

Balance Sheet Presentation A comparison of the capital section of the balance sheet for a sole proprietorship and for a corporation follows: Sole Proprietorship Owner’s Equity: Owner’s Capital

AS YOU

READ

Key Point The Accounting Equation The basic accounting equation applies to any business regardless of the form of business organization: Assets  Liabilities
Stockholders’ Equity

Corporation Stockholders’ Equity: Capital Stock Retained Earnings

Characteristics of Financial Information What Qualities Are Required in Financial Statements? At the end of a period, a business prepares various financial statements. These statements summarize the changes that have taken place during the period and report the financial condition of the business at the end of the period. Financial statements are used by many groups: • • •

•

Managers analyze financial statements to evaluate past performance and to make informed decisions and predictions for future operations. Stockholders are interested in the performance, potential future growth, and success of the business. Creditors want to know a company’s ability to pay its debts in a timely manner and the amount of credit that should be extended to the company. Government agencies, employees, consumers, and the general public are also interested in the financial position of the business.

Comparability For accounting information to be useful, it must be understandable and comparable. The data must be presented in a way that lets users recognize similarities, differences, and trends from one period to another. Comparability allows accounting information to be compared from one

554

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 554

9/15/05 11:48:58 AM

fiscal period to another. The same types of statements, therefore, are prepared at the end of each period for the same length of time (for example, one month or one year). By comparing financial statements in different periods of equal length, financial patterns and relationships can be identified and analyzed, and the information from the analysis can be used to make decisions regarding business operations. Comparability also allows the comparison of financial information between businesses.

Reliability The users of accounting data assume that the data is reliable. Reliability refers to the confidence users have that the financial information is reasonably free from bias and error.

Relevance Relevance is the requirement that all information that would affect the decisions of financial statement users be disclosed in the financial reports.

Full Disclosure “To disclose” means “to uncover or to make known.” Full disclosure means that financial reports include enough information to be complete.

Materiality If something is “material,” it is important. In accounting, materiality means that relevant information should be included in financial reports.

A Corporation’s Financial Statements What Financial Statements Does a Merchandising Corporation Prepare? On Your Mark Athletic Wear, a merchandising corporation, prepares four financial statements: the income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows. Three statements report the changes that have taken place over the period. One statement, the balance sheet, shows the financial position of the business on a specific date—the last day of the period. The work sheet provides most of the information needed to complete all four statements. Today most businesses rely on automated equipment or computers to maintain the general and subsidiary ledgers and to prepare the end-of-period financial statements. Computers offer the advantages of speed and accuracy. The impact of a change in an estimate, operating procedure, or accounting method can be seen instantaneously. For example, electronic spreadsheets allow what-if analysis, which is when one or more variables are changed to see how the final outcome would be affected. Section 1 The Ownership of a Corporation

550-581_CH19_868829.indd 555

555

4/6/06 6:27:48 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a diagram like this one to describe the basic accounting equation for a corporation. Use three key terms from Section 1.





!CCOUNT.AME

!CCOUNT.AME

Do the Math Stock in Middlewood Corporation sells for $20 per share. The balance in the Capital Stock account at the beginning of the period was $72,400. The amount entered in the Balance Sheet section of the end-of-period work sheet is $83,100. How many shares of stock were sold during the fiscal period?

Problem 19–1 Analyzing Stockholders’ Equity Accounts 1. An investment of $60,000 by Kevin Cleary in his sole proprietorship is recorded as a credit to which account? 2. The sale of 100 shares of stock for $8,500 by the Sims Corporation is recorded as a credit to which account? 3. Stockholders’ equity consists of which two accounts?

Cindy’s Curtains

Problem 19–2 Analyzing a Source Document A sales slip for Cindy’s Curtains is presented at right. The accountant noticed errors in the calculations.

Instructions Check all calculations and recalculate the sales tax using a rate of 4 percent.

432 Meadowbrook Street Wilcoxson, Georgia 30345-8417 404-555-2488

DATE:

June 26, 20--

SOLD TO CLERK

CASH

K.C.

✓

QTY.

NO.

CHARGE

DESCRIPTION

2 Curtain Rods #21847 4 Anchor Pieces #23104 15 Feet of ribbon per ft.

Thank You!

556

1441

Rachel C. Washington 59 Priscilla Drive Park Ridge, IL 60068 TERMS

UNIT PRICE

AMOUNT

$ 14.95

$ 29 09

6.75

27 00

0.89

13 00

SUBTOTAL

$ 69 09

SALES TAX

2 76 $ 71 85

TOTAL

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 556

9/15/05 11:49:03 AM

SECTION 2

The Income Statement

In Section 1 you learned that corporations prepare four financial statements at the end of each period. In this section you will learn how to prepare and analyze the income statement.

How Is a Merchandising Business Income Statement Different from a Service Business Income Statement? As you know, the income statement reports the net income or loss earned by a business. In Chapter 9 you prepared an income statement for Roadrunner Delivery Service, a service business organized as a sole proprietorship. You subtracted total expenses from revenue to find the period’s net income or loss. When preparing the income statement, whether for a service or merchandising business, the revenue realization principle is applied. Revenue for a credit sale is recorded at the time of the sale because the account receivable is expected to be converted to cash. The matching principle is also applied when preparing the income statement. Expenses are matched with revenue earned during the same period. Merchandising businesses have an additional cost—the cost of the merchandise that is purchased and then resold to customers. The income statement for a merchandising business is thus expanded to include the cost of merchandise sold. An income statement for a merchandising business has five sections: Revenue Cost of Merchandise Sold Gross Profit on Sales

• •

Operating Expenses Net Income (or Loss)

A comparison of the income statements for a service business and for a merchandising business follows:

Service Business Roadrunner Delivery Service Revenue  Expenses Net Income (Loss)

READ

Main Idea

The Income Statement

• • •

BEFORE YOU

Merchandising Business On Your Mark Athletic Wear Revenue  Cost of Merchandise Sold Gross Profit on Sales  Operating Expenses Net Income (Loss)

A merchandiser’s income statement has a Cost of Merchandise Sold section, and a corporation’s income statement shows income tax expense.

Read to Learn… ➤ how to prepare an

income statement for a merchandising business organized as a corporation. (p. 557) ➤ how to apply vertical analysis to a financial statement. (p. 562)

Key Terms

net sales net purchases gross profit on sales operating expenses selling expenses administrative expenses operating income vertical analysis

On Your Mark’s income statement has four amount columns (see Figure 19–1). Totals are entered in the far right column. Balances that are added or subtracted are entered in the other columns. The format of a computer-generated income statement can vary from the format of an Section 2 The Income Statement

550-581_CH19_868829.indd 557

557

4/6/06 6:27:52 PM

On Your Mark Athletic Wear Income Statement For the Year Ended December 31, 20-Revenue: Sales Less: Sales Discounts Sales Returns and Allowances Net Sales

Figure 19–1 The Heading and Revenue Section of the Income Statement

320 4 5 0 00 7 3 0 00 2 0 0 0 00

2 7 3 0 00 317 7 2 0 00

income statement prepared manually on accounting stationery. Regardless of how an income statement is prepared, the formats are very similar. All information needed to prepare the income statement comes from the work sheet, particularly the Income Statement section. As with all other financial statements, the income statement begins with a three-line heading. The income statement for On Your Mark is prepared for the year ended December 31.

The Revenue Section The first section on the income statement is the revenue section. This section reports the net sales for the period. The balances of the Sales revenue account and the Sales Discounts and Sales Returns and Allowances contra revenue accounts are reported in this section. Remember that contra revenue accounts decrease the revenue account. Therefore, net sales is the amount of sales for the period less any sales discounts, returns, and allowances. Refer to Figure 19–1 as you learn how to complete the revenue section. 1. On the first line, enter the classification Revenue: at the left edge of the stationery. 2. On the second line, enter the name of the revenue account Sales, indented about half an inch. Enter the balance of the account in the third amount column. 3. On the next lines, enter the deductions from Sales. Write the word Less: followed by the names and balances of the two contra revenue accounts. (You may have to abbreviate the account names.) Enter the balances of the accounts in the second amount column. 4. Add the balances of the two contra revenue accounts. Write the total below the Sales balance on the fourth line, in the third amount column. 5. On the next line, enter the words Net Sales, indented about an inch. Subtract the total of the two contra accounts from the balance of the Sales account. Enter the amount in the fourth amount column. On Your Mark’s net sales for the year are $317,720.

The Cost of Merchandise Sold Section The cost of merchandise sold section follows the revenue section. As the words indicate, the cost of merchandise sold is the actual cost to the business of the merchandise it sold to customers during the period.

558

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 558

9/15/05 11:49:07 AM

The cost of merchandise sold is calculated as follows:

Beginning Merchandise Inventory
Net Purchases During the Period Cost of Merchandise Available for Sale  Ending Merchandise Inventory Cost of Merchandise Sold Computing the cost of merchandise sold requires two steps: 1. Determine the cost of all merchandise available for sale. 2. Calculate the cost of merchandise sold.

Calculating Cost of Merchandise Available for Sale. To calculate the cost of merchandise available for sale, add net purchases to the beginning inventory amount. Net purchases represents all costs related to merchandise purchased during the period. To calculate net purchases, add the transportation charges for the period (Transportation In) to the Purchases balance and then subtract the balances of Purchases Discounts and Purchases Returns and Allowances. Purchases
Transportation In Cost of Delivered Merchandise  Purchases Discounts  Purchases Returns and Allowances Net Purchases Calculating Cost of Merchandise Sold. To calculate the cost of merchandise sold, subtract the ending merchandise inventory amount from the cost of merchandise available for sale. Refer to Figure 19–2 on page 560 as you learn how to complete the cost of merchandise sold section. 1. On the line below net sales, enter the words Cost of Merchandise Sold: at the left edge. 2. Next, enter Merchandise Inventory, January 1, 20— indented about half an inch. Enter the amount of the beginning inventory in the third amount column. (The beginning inventory is found on the work sheet, in the Trial Balance section, on the Merchandise Inventory line.) 3. Next, enter Purchases, indented about half an inch, and place the Purchases account balance in the first amount column. 4. On the next line, enter Plus: Transportation In indented about half an inch. Enter the balance of Transportation In in the first amount column, below the Purchases amount. Draw a line across the first amount column under the Transportation In amount. 5. On the next line, write Cost of Delivered Merchandise indented about half an inch. Add the balances of Purchases and Transportation In. Enter the result in the second amount column. 6. On the next line, write Less: Purchases Discounts, indented about half an inch, and place the Purchases Discounts account balance in the first amount column. 7. On the next line, write Purchases Returns and Allowances so that it lines up with Purchases Discounts in the line above and place the Section 2 The Income Statement

550-581_CH19_868829.indd 559

559

9/15/05 11:49:09 AM

On Your Mark Athletic Wear Income Statement For the Year Ended December 31, 20-Revenue: Sales Less: Sales Discounts Sales Returns and Allowances Net Sales Cost of Merchandise Sold: Merchandise Inventory, January 1, 20-Purchases Plus: Transportation In Cost of Delivered Merchandise Less: Purchases Discounts Purchases Returns and Allowances Net Purchases Cost of Merchandise Available Merchandise Inventory, December 31, 20-Cost of Merchandise Sold Gross Profit on Sales

Figure 19–2 Income Statement Through Gross Profit on Sales

8.

9.

10.

11.

12.

560

320 4 5 0 00 7 3 0 00 2 0 0 0 00

2 7 3 0 00 317 7 2 0 00 84 9 2 1 00

206 7 0 0 00 4 0 3 6 18 210 7 3 6 18 1 3 4 0 00 1 8 0 0 00

3 1 4 0 00 207 5 9 6 18 292 5 1 7 18 81 3 8 5 00 211 1 3 2 18 106 5 8 7 82

Purchases Returns and Allowances account balance in the first amount column. To find the total deduction from Purchases, add the balances of the Purchases Discounts and Purchases Returns and Allowances accounts. Enter the total on the Purchases Returns and Allowances line, in the second amount column. Draw a line across the first and second amount columns under this total. On the next line, write Net Purchases indented about half an inch. Subtract the total of the Purchases Discounts and Purchases Returns and Allowances accounts from the cost of delivered merchandise. The difference is the amount of net purchases for the period. Enter the amount in the third amount column. Draw a line across the third amount column under this amount. On the next line, write Cost of Merchandise Available indented about half an inch. Add the net purchases amount to the beginning inventory amount. The total is the cost of merchandise available for sale. Enter the total in the third amount column. On the next line, write Merchandise Inventory, December 31, 20— indented about half an inch. Enter the amount of the ending inventory in the third amount column. (The ending inventory is found on the work sheet, in the Balance Sheet section, on the Merchandise Inventory line.) Draw a line across the third amount column under this amount. On the next line, write Cost of Merchandise Sold indented about one inch. Subtract the ending inventory amount from the cost of merchandise available for sale. The difference is the cost of merchandise sold during the period. Enter the amount in the fourth amount column. Draw a line across the fourth amount column under this amount.

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 560

9/15/05 11:49:13 AM

The Gross Profit on Sales Section After the cost of merchandise sold has been calculated, the gross profit on sales can be determined. The gross profit on sales during the period is the profit made before operating expenses are deducted. Gross profit on sales is found by subtracting the cost of merchandise sold from net sales. Gross Profit on Sales is entered at the left edge, and the amount is placed in the fourth amount column. In Figure 19–2 you can see that On Your Mark’s gross profit on sales is $106,587.82.

AS YOU

READ

Instant Recall Gross Recall that gross means the total amount before deductions or subtractions.

The Operating Expenses Section The next section of the income statement shows the operating expenses for the period. Operating expenses are the costs of the goods and services used in the process of earning revenue for the business. Some businesses choose to further classify operating expenses into selling expenses (incurred to sell or market the merchandise sold) and administrative expenses (related to the management of the business). Look at Figure 19–3 on page 562. Operating Expenses is entered at the left edge on the line following the gross profit on sales. On the following lines, the names and balances of all expense accounts except Federal Corporate Income Tax Expense are listed in the same order as on the work sheet. Federal corporate income tax is a normal expense for a corporation, but it is not considered to be an operating expense. Rather than a cost related to earning revenue, income tax represents a cost resulting from the revenue earned. Notice that the balances of the expense accounts are entered in the third amount column. The balances are totaled. The total, $63,918.10, is entered in the fourth amount column.

The Net Income Section The final section of the income statement reports the net income (or net loss) for the period, both before and after federal corporate income taxes. It is customary to present the federal corporate income tax amount separately on the income statement. This is done so that the income statement shows the amount of operating income. Operating income is the excess of gross profit over operating expenses. It is the amount of income earned before deducting federal corporate income taxes. Look at Figure 19–3 again. To calculate operating income, subtract the total operating expenses from the gross profit on sales. On Your Mark’s operating income for the period is $42,669.72. To calculate net income, follow these steps.

AS YOU

READ

Compare and Contrast Explain the difference between operating income and net income.

1. Enter Less: Federal Corporate Income Tax Expense on the next line, indented about half an inch. 2. Enter the amount of income taxes, $9,995, in the fourth amount column. Federal corporate income taxes appear in the Income Statement section of the work sheet. Draw a line across the fourth column under this amount. 3. Enter Net Income (or Net Loss) on the next line at the left edge. 4. Subtract the amount of federal corporate income taxes from the operating income. The result is net income or net loss. Section 2 The Income Statement

550-581_CH19_868829.indd 561

561

9/15/05 11:49:14 AM

On Your Mark Athletic Wear Income Statement For the Year Ended December 31, 20-Revenue: Sales Less: Sales Discounts Sales Returns and Allowances Net Sales Cost of Merchandise Sold: Merchandise Inventory, January 1, 20-Purchases Plus: Transportation In Cost of Delivered Merchandise Less: Purchases Discounts Purchases Returns and Allowances Net Purchases Cost of Merchandise Available Merchandise Inventory, December 31, 20-Cost of Merchandise Sold Gross Profit on Sales Operating Expenses: Advertising Expense Bank Card Fees Expense Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense Total Operating Expenses Operating Income Less: Federal Corporate Income Tax Expense Net Income

Figure 19–3 On Your Mark’s Completed Income Statement

320 4 5 0 00 7 3 0 00 2 0 0 0 00

2 7 3 0 00 317 7 2 0 00 84 9 2 1 00

206 7 0 0 00 4 0 3 6 18 210 7 3 6 18 1 3 4 0 00 1 8 0 0 00

3 1 4 0 00 207 5 9 6 18 292 5 1 7 18 81 3 8 5 00 211 1 3 2 18 106 5 8 7 82 2 450 4 199 125 3 519 348 3 826 14 0 0 0 29 3 7 4 3 710 2 364

00 27 00 25 28 83 00 60 00 87 63 42 9 32

9 6 9 6

1 6 9 7

8 9 5 4

10 72 00 72

5. Enter the difference, $32,674.72, in the fourth amount column. Net income on the income statement must agree with the net income shown on the work sheet. If it does, draw a double rule under the amount to show that the income statement is proved and complete. If it does not, check the addition and subtraction on the income statement. Also check that all the accounts and balances in the Income Statement section of the work sheet appear correctly on the income statement.

Analyzing Amounts on the Income Statement Why Do People Look at Percentages? Managers use financial analysis to evaluate the company’s financial performance. The information reported on the income statement and other 562

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 562

9/15/05 11:49:15 AM

financial statements is expressed in dollars. Dollar amounts are useful, but the analysis can be expanded and made more meaningful by expressing the dollar amounts as percentages. These percentages more clearly indicate the relationships among the items on the financial statements. They also enable financial statement users to compare the relationships within an accounting period and changes in these relationships between accounting periods. One type of analysis is called vertical analysis . With vertical analysis, each dollar amount reported on a financial statement is also reported as a percentage of another amount, called a base amount, appearing on that same statement. For example, on the income statement, each amount is reported as a percentage of net sales. Current-period percentages can be compared with percentages from past periods or with percentages from other companies within the same industry. Figure 19–4 shows a comparative income statement. As you can see, the net sales amount for each year is assigned a percentage of 100. Every other amount on the income statement is stated as a percentage of the net sales amount. Notice that net income was 14.68 percent of net sales in the previous year and only 10.28 percent of net sales for the current year. Managers would want to find the cause to interpret (explain) the decrease. Analysis like this helps managers make informed decisions about future operations.

Current Year Revenue: Sales Less: Sales Discounts Sales Ret. and Allow. Net Sales Cost of Merchandise Sold: Merch. Inventory, Jan. 1 Net Purchases Merch. Available for Sale Merch. Inventory, Dec. 31 Cost of Merchandise Sold Gross Profit on Sales Operating Expenses: Advertising Expense Bankcard Fees Expense Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense Total Operating Expenses Operating Income Fed. Corp. Inc. Tax Exp. Net Income

$ 320,450.00 730.00 2,000.00 $ 317,720.00

Key Point Vertical Analysis Vertical analysis expresses financial statement items as percentages of a base amount.

Previous Year

Percent 100.86 % 0.23 0.63 100.00 %

$ 84,921.00 207,596.18 292,517.18 81,385.00 $ 211,132.18 $ 106,587.82

26.73 65.34 92.07 25.62 66.45 33.55

%

$

0.77 1.32 0.04 1.11 0.11 1.20 4.41 9.25 1.17 0.74 20.12 13.43 3.15 10.28

2,450.00 4,199.27 125.00 3,519.25 348.28 3,826.83 14,000.00 29,374.60 3,710.00 2,364.87 $ 63,918.10 $ 42,669.72 9,995.00 $ 32,674.72

READ

Figure 19–4 Comparative Income Statement Showing Vertical Analysis

On Your Mark Athletic Wear Comparative Income Statement For the Current and Previous Years Ended December 31

Dollars

AS YOU

Dollars $ 296,350.00 625.00 1,700.00 $ 294,025.00

Percent 100.79 % 0.21 0.58 100.00 % 27.92 63.54 91.47 28.88 62.59 37.41

%

% %

$ 82,100.00 186,836.56 $ 268,936.56 84,921.00 $ 184,015.56 $ 110,009.44

%

$

0.61 1.21 0.00 1.13 0.25 1.17 4.49 8.99 1.01 0.78 19.64 17.77 3.09 14.68

%

%

% % %

1,779.00 3,569.37 0.00 3,308.10 742.00 3,444.15 13,200.00 26,437.14 2,968.00 2,305.75 $ 57,753.51 $ 52,255.93 9,085.00 $ 43,170.93

% % %

% % %

AS YOU

READ

In Your Own Experience Name a corporation whose profits or losses have been reported in a newspaper, on TV or radio, or on the Internet. Why was this information important enough to be reported in the mass media?

Section 2 The Income Statement

550-581_CH19_868829.indd 563

563

9/15/05 11:49:17 AM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a diagram like this one to describe the steps for preparing an income statement for a merchandising corporation.

0REPARINGAN)NCOME3TATEMENTFORA-ERCHANDISING#ORPORATION

Do the Math Look at the comparative income statement provided here and answer the following questions using the vertical analysis of this financial statement. 1. What is the trend in sales? 2. How is that trend affecting the net income? 3. What expenses have decreased in the past year (as a percent of sales)? 4. Are there any significant changes in inventory? 5. What is the largest expense? 6. Would you invest your money in this business? Why or why not?

Comparative Income Statement For the Current and Previous Years Ended December 31 Current Year Dollars Revenue: Sales Less: Sales Ret. and Allow. Net Sales Cost of Merchandise Sold: Merch. Inventory, Jan. 1 Net Purchases Merch. Available for Sale Merch. Inventory, Dec. 31 Cost of Merchandise Sold Gross Profit on Sales Operating Expenses: Advertising Expense Bankcard Fees Expense Insurance Expense Maintenance Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense Total Operating Expenses Operating Income Fed. Corp. Inc. Tax Exp. Net Income

$ 1,500,000 2,000 $ 1,498,000 $

Previous Year

Percent 100.13 % 0.13 100.00 %

250,000 800,000 $ 1,050,000 60,000 $ 990,000 $ 508,000

16.69 53.40 70.09 4.01 66.09 33.91

%

$

3.34 0.67 0.35 0.60 0.41 1.34 3.87 0.20 0.16 10.94 22.97 3.00 19.97

$ $ $

50,000 10,000 5,300 9,000 6,200 20,000 58,000 3,000 2,400 163,900 344,100 44,940 299,160

Dollars $ 850,000 2,200 $ 847,800

Percent 100.26 % 0.26 100.00 % 11.80 76.67 88.46 29.49 58.98 41.02

%

% %

$ 100,000 650,000 $ 750,000 250,000 $ 500,000 $ 347,800

%

$

2.95 0.94 0.63 0.88 0.38 2.36 5.66 0.26 0.22 14.28 26.75 3.00 23.75

%

%

% % %

25,000 8,000 5,300 7,500 3,200 20,000 48,000 2,200 1,850 $ 121,050 $ 226,750 25,434 $ 201,316

% % %

% % %

Problem 19–3 Calculating Amounts on the Income Statement Instructions For each group of figures that follows, determine the missing amount. 1. Beginning merchandise inventory Net purchases Cost of merchandise available for sale 2. Net sales Cost of merchandise sold Gross profit on sales 3. Purchases Transportation in Cost of delivered merchandise 4. Cost of merchandise available for sale Ending merchandise inventory Cost of merchandise sold 564

$81,367 15,139 ? $52,935 36,232 ? $26,472 1,311 ? $49,769 32,621 ?

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 564

9/15/05 11:49:19 AM

SECTION 3

The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

In the previous section, you learned how to prepare and analyze the income statement, which reports the net income or loss for the period. In this section you will learn about a corporation’s statement of retained earnings, balance sheet, and statement of cash flows.

The Statement of Retained Earnings What Does This Statement Report? A corporation has two stockholders’ equity accounts, Capital Stock and Retained Earnings. The Capital Stock account represents the stockholders’ investment in the corporation. Its balance changes only when the corporation issues additional shares of stock. The Retained Earnings account summarizes the accumulated profits of a corporation minus any amounts paid to stockholders as returns on their investments. In Chapter 9 you learned about the statement of changes in owner’s equity for a sole proprietorship. It shows the changes in the owner’s capital account during the period. A corporation prepares a similar statement, the statement of retained earnings , that reports the changes in the Retained Earnings account during the period. These changes result from business operations and dividends, which are the distributions of earnings to stockholders. The changes to Retained Earnings are summarized as follows: Retained Earnings Debit
Decreased by net loss dividends

Credit  Increased by net income

The statement of retained earnings is prepared from information found on the work sheet. The statement of retained earnings is a supporting document for the balance sheet. The final balance of the Retained Earnings account, as calculated on the statement of retained earnings, is used when preparing the balance sheet. Figure 19–5 shows the statement of retained earnings for On Your Mark. The first line shows the balance of the Retained Earnings account at the beginning of the period. This balance comes from the Balance

BEFORE YOU

READ

Main Idea

In addition to the income statement, a corporation prepares the statement of retained earnings, the balance sheet, and the statement of cash flows.

Read to Learn…

➤ how and why a statement

of retained earnings is prepared. (p. 565) ➤ how to prepare a balance sheet for a merchandising business organized as a corporation. (p. 566) ➤ how to apply horizontal analysis to a financial statement. (p. 568) ➤ about the statement of cash flows. (p. 569)

Key Terms

statement of retained earnings horizontal analysis base period cash inflows cash outflows operating activities investing activities financing activities

Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

550-581_CH19_868829.indd 565

565

9/15/05 11:49:22 AM

Sheet section of the work sheet. The second line is the net income for the period. This is from the Income Statement columns of the work sheet. Add net income to the beginning balance of the Retained Earnings account. Since On Your Mark did not distribute any of its net income to stockholders during the period, there are no deductions from Retained Earnings. The new balance of the Retained Earnings account is $52,445.91. On Your Mark Athletic Wear Statement of Retained Earnings For the Year Ended December 31, 20-Retained Earnings, January 1, 20-Net Income Retained Earnings, December 31, 20--

19 7 7 1 19 32 6 7 4 72 52 4 4 5 91

Figure 19–5 Statement of Retained Earnings

The Balance Sheet How Is the Balance Sheet for a Corporation Different from the Balance Sheet for a Sole Proprietorship? The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. The balance sheet is prepared from the information in the Balance Sheet section of the work sheet and from the statement of retained earnings. Figure 19–6 shows On Your Mark’s balance sheet. This balance sheet is prepared in report form. In the report form, classifications (assets, liabilities, and stockholders’ equity) are shown one under the other. The assets are listed first. The classification Assets is centered on the first line. The account names are listed at the left edge in the same order as they appear on the work sheet. The individual balances are entered in the first amount column. Total Assets is entered on the line below the last account name, indented about half an inch. The total assets amount is entered in the second amount column. The double rule, however, is not drawn until the Liabilities and Stockholders’ Equity sections are complete, and the total of these two sections equals the total of the Assets section. The Liabilities section begins with Liabilities centered on the second line below total assets. As in the Assets section, the account names are listed at the left edge in the same order as they appear on the work sheet. The individual balances are entered in the first amount column. Total Liabilities follows on the line below the last account name, indented about half an inch. The total liabilities amount is then entered in the second amount column. Next, the Stockholders’ Equity section begins on the second line below total liabilities. Stockholders’ Equity, which is centered on this line, consists of two accounts, Capital Stock and Retained Earnings. The Capital Stock account balance is from the work sheet’s Balance Sheet section. The Retained Earnings account balance is from the statement of retained earnings. Again, 566

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 566

4/6/06 6:28:03 PM

the account names are listed at the left edge, and their individual balances are listed in the first amount column. Total Stockholders’ Equity follows on the line below the last account name, indented about half an inch. The stockholders’ equity total is entered in the second amount column. On the line following total stockholders’ equity, Total Liabilities and Stockholders’ Equity is entered at the left edge. The total of the Liabilities section and the total of the Stockholders’ Equity section are added. The total is entered in the second amount column. This total must agree with the total assets amount. If it does, double rule the balance sheet. If it does not, check the addition on the balance sheet. Also check that the accounts and amounts have been transferred from the work sheet accurately. On Your Mark Athletic Wear Balance Sheet December 31, 20-Assets Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Delivery Equipment Office Equipment Store Equipment Total Assets

15 10 81 1 1 19 9 5

Liabilities Accounts Payable Federal Corporate Income Tax Payable Employees’ Federal Income Tax Payable Employees’ State Income Tax Payable Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Total Liabilities

13 8 5 0 155 640 80 248 58 18 114 2 428

Stockholders’ Equity Capital Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

179 404 385 839 375 831 825 200

00 00 00 00 00 00 00 00 145 0 3 8 00

00 00 00 00 00 00 36 73 00 17 5 9 2 09

75 0 0 0 00 52 4 4 5 91 127 4 4 5 91 145 0 3 8 00

Figure 19–6 On Your Mark’s Balance Sheet

Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

550-581_CH19_868829.indd 567

567

9/15/05 11:49:39 AM

Analyzing Amounts on the Balance Sheet How Can You Detect Trends? When analyzing financial statements, you learned that while the dollar amounts provided on the statements are useful, the analysis can be expanded and made more meaningful by expressing the dollar amounts as percentages. Percentage amounts are used in vertical analysis and also in horizontal analysis. Horizontal analysis is the comparison of the same items on financial statements for two or more accounting periods or dates, and the determination of changes from one period or date to the next. In horizontal analysis, each amount on the current statement is compared with its corresponding amount on the previous statement. A base period is a period, usually a year, that is used for comparison. Look at the example of a comparative balance sheet in Figure 19–7. By comparing the amounts for the two years, you can see that Cash in Bank increased by 49.76 percent and Accounts Payable decreased by 50.73 percent. The accountant might use this information to assess why cash has

MATH HINTS Percentage Change

To find the percent of increase, subtract the base year amount from the current year amount, and then divide by the base year amount. For example: • if assets in the base year are $240,000 and $280,000 this year, • the increase is $40,000. • The percentage change is 17 percent ($40,000  $240,000).

On Your Mark Athletic Wear Comparative Balance Sheet December 31, Current Year and Previous Year

Current Year Assets Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Delivery Equipment Office Equipment Store Equipment Total Assets Liabilities Accounts Payable Fed. Corp. Inc. Tax Payable Employees’ Fed. Inc. Tax Pay. Employees’ State Inc. Tax Pay. Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Pay. State Unemployment Tax Pay. Sales Tax Payable Total Liabilities Stockholders’ Equity Capital Stock Retained Earnings Total Stockholders’ Equity Total Liab. and Stockhldrs’ Equity

Increase (Decrease) Current over Previous

Previous Year

Dollars

Percent

$ 15,179.00 10,404.00 81,385.00 1,839.00 1,375.00 19,831.00 9,825.00 5,200.00 $ 145,038.00

$ 10,135.28 8,220.00 84,921.00 1,587.00 0.00 12,462.00 5,854.00 3,500.00 $ 126,679.28

$

5,043.72 2,184.00 (3,536.00) 252.00 1,375.00 7,369.00 3,971.00 1,700.00 $ 18,358.72

49.76 % 26.57 (4.16) 15.88 — 59.13 67.83 48.57 14.49 %

$ 13,850.00 155.00 640.00 80.00 248.00 58.00 18.36 114.73 2,428.00 $ 17,592.09

$ 28,113.14 140.00 685.00 72.00 241.00 56.35 16.50 103.10 2,481.00 $ 31,908.09

$ (14,263.14) 15.00 (45.00) 8.00 7.00 1.65 1.86 11.63 (53.00) $ (14,316.00)

(50.73)% 10.71 6.57 11.11 2.90 2.93 11.27 11.14 2.14 (44.87)%

$ 75,000.00 52,445.91 $ 127,445.91 $ 145,038.00

$ 75,000.00 19,771.19 $ 94,771.19 $ 126,679.28

$

0.00 % 165.26 34.48 % 14.49 %

0.00 32,674.72 $ 32,674.72 $ 18,358.72

Figure 19–7 Comparative Balance Sheet Showing Horizontal Analysis 568

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 568

4/6/06 6:28:09 PM

increased or why accounts payable have decreased. Perhaps the business is receiving more sales in cash instead of on account. The business may also be purchasing less inventory on account. These are trends that would be of interest to management.

The Statement of Cash Flows What Does the Statement of Cash Flows Report? As you learned in Chapter 9, the statement of cash flows reports how the activities of a business caused the cash balance to change during the accounting period. This information is vital for sound decision making. See Figure 19–8 on page 570 for On Your Mark’s statement of cash flows. Most businesses consider cash to be a major asset, and they need a sufficient amount to operate efficiently. Maintaining a positive cash flow is a primary goal of financial management. An adequate amount of available cash allows a business to pay its debts in a timely manner, take advantage of discounts, purchase equipment, and fund expansion. Creditors and investors use the statement of cash flows to evaluate a company’s ability to pay its debts and pay dividends. Cash inflows (receipts of cash) come into and cash outflows (payments of cash) go out of a business from different activities. The statement of cash flows classifies these activities as operating, investing, or financing.

Cash Flows from Operating Activities Operating activities include all transactions that occurred during the accounting period as part of normal business operations. The information needed to complete this section is taken from On Your Mark’s income statement (Figure 19–3) and comparative balance sheet (Figure 19–7). Recall that revenue is recorded when it is earned and expenses are recorded when they are incurred, regardless of when items are actually paid. This is called the accrual basis of accounting. To determine operating cash inflows and outflows for the accounting period, the accountant must convert income statement and balance sheet amounts to the cash basis of accounting, which records revenues only when cash is received and expenses only when cash is paid out. This is the reason that On Your Mark’s net sales reported on the income statement is $317,720.00, but sales to customers reported on the statement of cash flows is $315,536.00.

Cash Flows from Investing Activities Investing activities include loans the business makes, payments received for those loans, purchase and sale of plant assets, and investments. Plant assets are property that will be used in the business for more than one year. During the current accounting period, On Your Mark purchased delivery equipment, office equipment, and store equipment for cash. When a plant asset is purchased for cash, the appropriate general ledger asset account is Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

550-581_CH19_868829.indd 569

569

9/15/05 11:49:42 AM

On Your Mark Athletic Wear Statement of Cash Flows For the Year Ended December 31, 20-Cash Flows from Operating Activities Cash Receipts from: Sales to Customers Total Cash Receipts from Operating Activities Cash Payments for: Purchases Accrued Payables Operating Expenses Federal Corporate Income Tax Expense Total Cash Payments from Operating Activities Net Cash Flows from Operating Activities

$ 315,536.00 $ 315,536.00 (221,859.32) (67.86) (65,545.10) (9,980.00) (297,452.28) $ 18,083.72

Cash Flows from Investing Activities Purchase of Plant Assets Net Cash Flows from Investing Activities

(13,040.00) (13,040.00) -0-

Cash Flows from Financing Activities $

Net Increase in Cash

5,043.72

Figure 19–8 Statement of Cash Flows debited and Cash in Bank is credited. Since the purchase of plant assets is a cash outflow, the $13,040.00 is placed in parentheses on the statement of cash flows.

Cash Flows from Financing Activities Financing activities are the borrowing activities needed to finance the company operations and the repayment of these debts. On Your Mark had no financing activities during this accounting period. The statement of cash flows indicates that cash increased by $5,043.72 during the period. This amount agrees with the increase in cash shown on the comparative balance sheet. Typical cash inflows and outflows for the three activities of a business are shown here. Activity

Cash Inflows (receipts)

Cash Outflows (payments)

Operating Activities

• •

Sales Interest Income

• • • •

Merchandise Purchases Operating Expenses Interest Expense Fed. Corp. Income Tax

Investing Activities

• •

Selling plant assets Selling investments

• •

Purchasing plant assets Purchasing investments

Financing Activities

• •

Long-term borrowing Issuing stock

•

Repaying loans (principal, not interest) Paying dividends on stock

•

570

Chapter 19 Financial Statements for a Corporation

550-581_CH19_868829.indd 570

9/15/05 11:50:08 AM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a chart like this one to describe how stockholders and creditors use each of the listed financial statements.

3TOCKHOLDERS

#REDITORS

3TATEMENTOF2ETAINED%ARNINGS

"ALANCE3HEET

3TATEMENTOF#ASH&LOWS

Do the Math Larry Campbell is the owner of Craftsman Furniture, a successful family-owned furniture store. As the accountant for Craftsman Furniture, it is your responsibility to run a vertical analysis on the income statement. Mr. Campbell asks you to prepare an Executive Summary of a three-year vertical analysis. Using the information provided, calculate the percentages for each year in your working papers and complete the columns of the draft report. Mr. Campbell will review the draft with you so he clearly understands the trends in sales for Craftsman Furniture.

Net Sales Gross Profit on Sales Total Operating Expenses Net Income

Year 1 $ 1,000,000 600,000 25,000 $ 575,000

Year 2 $ 1,500,000 750,000 21,000 $ 729,000

Year 3 $ 1,600,000 780,000 23,000 $ 757,000

Problem 19–4 Analyzing a Balance Sheet Use the comparative balance sheet for On Your Mark in Figure 19–7 to answer the following questions. 1. Which asset account has the larger percentage of increase in the two years? Larger decrease? 2. Which liability account has the larger percentage increase in the two years? 3. Did the overall value (total assets) of the corporation increase or decrease in the two years? What is the dollar amount? What is the percentage? 4. What is the percentage increase in retained earnings in the two years? 5. What conclusions might you draw based on the change in Accounts Receivable? Accounts Payable? 6. Can you provide a possible explanation for the difference in the balance of the Prepaid Insurance account? Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

550-581_CH19_868829.indd 571

571

4/6/06 6:28:20 PM

Summary

CH A P T ER 19 Key Concepts

1. Individuals become owners of a corporation by buying shares of stock. This ownership is known as stockholders’ equity. Here is the entry to record ownership of a corporation:

GENERAL JOURNAL DATE 1 2 3

DESCRIPTION

20-Date 1 Cash in Bank Capital Stock

POST. REF.

PAGE DEBIT

1

CREDIT 1

x x xxx xx

2

xx xxx xx

4

3 4

2. The work sheet is a tool that organizes all the accounting information needed to prepare the financial statements. Corporations prepare the income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows. • Most of the information needed to complete the income statement comes from the work sheet’s Income Statement section. • The statement of retained earnings reports the changes in the Retained Earnings account. • The corporate balance sheet information comes from the work sheet’s Balance Sheet section. • Information for the statement of cash flows comes from the income statement and the comparative balance sheet. 3. The primary difference between financial statements for a sole proprietorship and a corporation involves how ownership is presented on the balance sheet.

Balance Sheet Section Account(s)

Sole Proprietor

Corporation

Owner’s Equity

Stockholders’ Equity

Owner’s Capital—the owner’s investment of cash and assets in the business

• Capital Stock—the investments by stockholders (owners) • Retained Earnings—earnings the corporation generated in past periods and retained instead of distributing to stockholders as dividends

4. For a merchandising business, the income statement contains the following elements: • Net sales (total sales minus deductions for sales discounts, returns, and allowances). • Net purchases (total cost of merchandise bought plus transportation charges minus deductions for purchases discounts, returns, and allowances).

572

Chapter 19 Summary

550-581_CH19_868829.indd 572

9/15/05 11:50:12 AM

Summary

CHAPT E R 1 9

• Cost of merchandise sold calculated as follows:

Beginning Merchandise Inventory
Net Purchases During the Period Cost of Merchandise Available for Sale  Ending Merchandise Inventory Cost of Merchandise Sold • • • • •

Gross profit on sales (net sales minus cost of merchandise sold) Operating expenses Operating income Federal income tax paid by a corporation (listed separately) Net income or net loss

The statement of retained earnings reports the changes in the corporate Retained Earnings account that occurred during the period as a result of business operations and the distribution of earnings to stockholders through dividends. The balance sheet reports asset, liability, and stockholders’ equity accounts for a specific date and comes from the work sheet’s Balance Sheet section. The statement of cash flows reports how the activities of a business caused the cash balance to increase or decrease during the accounting period. 5. Vertical analysis helps the accountant determine the relationships among items on a financial statement and the changes in these relationships from one period to another. Horizontal analysis compares amounts for the same item on a financial statement for two or more accounting periods.

Key Terms administrative expenses

(p. 561)

net purchases

(p. 559)

base period

(p. 568)

net sales

(p. 558)

Capital Stock

(p. 552)

operating activities

(p. 569)

cash inflows

(p. 569)

operating expenses

(p. 561)

cash outflows

(p. 569)

operating income

(p. 561)

comparability

(p. 554)

relevance

(p. 555)

financing activities

(p. 570)

reliability

(p. 555)

full disclosure

(p. 555)

retained earnings

(p. 554)

gross profit on sales

(p. 561)

selling expenses

(p. 561)

horizontal analysis

(p. 568)

statement of retained earnings

(p. 565)

investing activities

(p. 569)

stockholders’ equity

(p. 552)

materiality

(p. 555)

vertical analysis

(p. 563)

Chapter 19 Summary

550-581_CH19_868829.indd 573

573

9/15/05 11:50:16 AM

C H A P T ER 19 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

Ownership of a Corporation a. How are stockholders’ equity and owner’s equity similar? b. What is retained earnings? Work Sheet and Financial Statements a. What four financial statements are prepared by a corporation? b. How is the work sheet used to prepare financial statements? Financial Statement Differences a. How does an income statement for a merchandising business differ from that for a service business? b. How does the stockholders’ equity section of a balance sheet differ from the owner’s equity section? Merchandising Corporation Financial Statements a. What type of expense appears on the income statement of a corporation but not on those of a sole proprietorship or partnership? b. What is the difference between the cost of merchandise available for sale and the cost of merchandise sold? Financial Statement Analysis a. Why would you analyze financial statement information using horizontal analysis? b. How is vertical analysis helpful?

Apply Key Terms Your company, The Bookworm, was purchased several months ago by an international bookstore chain—The Best Seller. Your new boss, Gabriella Sitta, asks you to create the end-of-year financial statements. Gabriella is not native to the United States and does not understand all the English-language business terms. On a separate sheet of paper, write each term’s definition and its relationship to the preparation of financial statements. administrative expenses base period Capital Stock cash inflows cash outflows comparability financing activities full disclosure

574

gross profit on sales horizontal analysis investing activities materiality net purchases net sales operating activities operating expenses operating income

relevance reliability retained earnings selling expenses statement of retained earnings stockholders’ equity vertical analysis

Chapter 19 Review and Activities

550-581_CH19_868829.indd 574

9/15/05 11:50:18 AM

Computerized Accounting

CHAPT E R 1 9

Preparing Financial Statements Making the Transition from a Manual to a Computerized System Task Preparing financial statements

Manual Methods • After all business transactions have been journalized and posted, prepare the trial balance. • Calculate, journalize, and post the adjusting entries. • Prepare the income statement, statement of retained earnings, and balance sheet.

Computerized Methods • After all business transactions have been journalized and posted, print a working trial balance. • Journalize the adjusting entries. • Print the income statement, statement of retained earnings, and balance sheet.

Q&A Peachtree Question How do I print the Income Statement, Statement of Retained Earnings, and Balance Sheet?

Answer 1. From the Reports menu, select Financial Statements. 2. Select Income Statement, Retained Earnings Statement, or Balance Sheet from the Preview list. 3. Click the Screen icon to display the Options window. 4. Select a time frame for the information to be included in the report. Current period is the default. 5. Review the statement on the screen. 6. Click Print.

QuickBooks Q & A QuickBooks Question How do I print the Profit & Loss report and Balance Sheet?

Answer 1. 2. 3. 4. 5.

From the Reports menu, select Company & Financial. Select Profit & Loss Standard or Balance Sheet Standard. Enter the correct dates for the statement. Review the statement on the screen. Click Print.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 19 Computerized Accounting

550-581_CH19_868829.indd 575

575

9/15/05 11:50:25 AM

Problems

C H A P T ER 19 Complete problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 19–5 1. Select the spreadsheet template for Problem 19–5. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

SMART GUIDE

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 19–5 Preparing an Income Statement The work sheet for Sunset Surfwear for the year ended December 31 is shown in your working papers.

Instructions Prepare an income statement for Sunset Surfwear in your working papers. Refer to Figure 19–3 for guidance in setting up the income statement.

Analyze

Problem 19–6 Preparing a Statement of Retained Earnings and a Balance Sheet Instructions Use the work sheet and the income statement from Problem 19–5 to prepare a statement of retained earnings and a balance sheet for Sunset Surfwear. Use the accounting stationery provided in your working papers.

Analyze

Step–by–Step Instructions: Problem 19–6 1. Select the problem set for Sunset Surfwear (Prob. 19–6). 2. Rename the company and set the system date. 3. Print a Statement of Retained Earnings and a Balance Sheet. 4. Complete the Analyze activity. 5. End the session.

QuickBooks PROBLEM GUIDE

Identify which general ledger account, Purchases Discounts or Purchases Returns & Allowances, had a higher amount this period.

Calculate the ending balance of Retained Earnings assuming Sunset Surfwear had a net loss of $6,492 instead of a net income for the period.

Problem 19–7 Preparing Financial Statements Instructions The partially completed work sheet for Shutterbug Cameras is included in your working papers. 1. 2. 3. 4.

Complete the work sheet. Prepare an income statement. Prepare a statement of retained earnings. Prepare a balance sheet.

Analyze

Identify the biggest asset account, the biggest liability account, and the highest expense account shown on the financial statements.

Step–by–Step Instructions: Problem 19–6 1. Restore the Problem 19-6. QBB file. 2. Print a Balance Sheet. 3. Complete the Analyze activity. 4. Back up your work.

576

Chapter 19 Problems

550-581_CH19_868829.indd 576

4/6/06 6:28:34 PM

Problems

CHAPT E R 1 9

Problem 19–8 Completing a Work Sheet and Financial Statements The trial balance for Cycle Tech Bicycles, prepared on a ten-column work sheet, is included in your working papers.

1

4 5 6 7 8 9 10 11 12

Ending merchandise inventory $25,191 Ending supplies inventory Expired insurance

13 14 15 16 17

1,221

18

825

20

Total federal corporate income taxes for the year 3,472

19

21 22 23 24 25 26

2. Prepare an income statement. 3. Prepare a statement of retained earnings. 4. Prepare a balance sheet.

TRIAL BALANCE

ACCT. NO.

3

1. Complete the work sheet for the year ended December 31. Use the following information to make the adjustments.

Step–by–Step Instructions: Problem 19–7

Cycle Tech Bicycles Work Sheet For the Year Ended December 31, 20--

2

Instructions

SMART GUIDE

27 28 29 30 31 32 33 34 35 36 37

101 115 125 130 135 140 145 201 210 211 212 213 214 215 216 217 301 305 310 401 405 410 501 505 510 515 601 605 625 630 645 650 655 657 660 665 675

ACCOUNT NAME

Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Store Equipment Office Equipment Accounts Payable Fed. Corp. Income Tax Payable Emplys’ Fed. Inc. Tax Payable Emplys’ State Inc. Tax Payable Social Security Tax Payable Medicare Tax Payable Sales Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Capital Stock Retained Earnings Income Summary Sales Sales Discounts Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Ret. and Allowances Advertising Expense Bankcard Fees Expense Fed. Corp. Income Tax Expense Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense

DEBIT

21 1 24 4 1 24 16

CREDIT

9 3 1 00 7 8 2 00 0 2 8 00 1 5 9 00 8 0 0 00 8 9 5 00 1 1 3 00 11 2 2 4 00 5 2 2 00 1 4 4 00 4 1 3 00 1 3 4 00 1 9 1 5 00 5 4 00 2 7 1 00 40 0 0 0 00 11 0 9 1 00 127 1 5 1 00

2 4 6 00 1 3 2 8 00 66 1 0 7 00 9 8 3 00 8 2 2 00 3 7 6 00 2 3 8 0 00 1 8 1 00 3 3 4 000 1 9 5 0 00 1 8 3 1 00 8 3 4 00 10 8 0 0 00 4 7 3 4 00 4 6 9 5 00

38

194 1 1 7 00 194 1 1 7 00

39 40

Net Income

41 42

Analyze

Predict whether net income would be higher or lower if the ending value of Merchandise Inventory was actually $28,000.

1. Select the problem set for Shutterbug Cameras (Prob. 19–7). 2. Rename the company and set the system date. 3. Print the following reports: Adjusted Trial Balance, Balance Sheet, Income Statement, and Statement of Retained Earnings. 4. Complete the Analyze activity. 5. End the session.

SMART GUIDE Step–by–Step Instructions: Problem 19–8 1. Select the problem set for Cycle Tech Bicycles (Prob. 19–8). 2. Rename the company and set the system date. 3. Print a Working Trial Balance to help you prepare the adjustments. 4. Record the adjustments using the General Journal Entry option. 5. Print a General Journal report and proof your work. 6. Print the following reports: Adjusted Trial Balance, Income Statement, Statement of Retained Earnings, and Balance Sheet. 7. Complete the Analyze activity. 8. End the session.

Chapter 19 Problems

550-581_CH19_868829.indd 577

577

9/15/05 11:50:29 AM

Problems

C H A P T ER 19 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 19–8 1. Restore the Problem 19-8.QBB file. 2. Print a Trial Balance to help you prepare the adjustments. 3. Record the adjustments using the Make General Journal Entries option. 4. Print a Journal report and proof your work. 5. Print the following reports: Trial Balance, Profit & Loss, and Balance Sheet. 6. Complete the Analyze activity. 7. Back up your work.

CHALLENGE PROBLEM

The accounting clerk for River’s Edge Canoe & Kayak prepared the income statement for the year ended December 31. The accounting supervisor at River’s Edge noticed that the balance of the Transportation In account was erroneously omitted from this statement. Transportation In has a balance of $562.

Instructions Use the income statement shown in your working papers to answer the following questions. 1. In which section of the income statement is the account Transportation In entered? 2. How is net purchases affected by this omission (understated or overstated)? By what amount? 3. How does the omission of the Transportation In balance affect gross profit on sales? By what amount? 4. What is the correct amount for the cost of merchandise sold for the period? 5. What is the correct amount for net income?

Analyze

578

Problem 19–9 Evaluating the Effect of an Error on the Income Statement

Determine the effect that an overstatement of expenses would have on net income.

Chapter 19 Problems

550-581_CH19_868829.indd 578

9/15/05 11:50:32 AM

Winning Competitive Events

CHAPTER 19

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. One way to increase gross profit on sales is to a. increase sales revenue. b. increase cost of merchandise sold. c. decrease sales revenue. d. decrease expenses. 2. The ________ account represents the increase in stockholders’ equity from net income that is held by the corporation and not distributed to stockholders as a return on their investment. a. operating income b. retained earnings c. working capital d. net sales 3. When using ________, each dollar amount on a financial statement is also stated as a percentage of a base amount on the same statement. a. horizontal analysis b. vertical analysis c. statement of retained earnings d. comparability 4. You are given the following information: cost of merchandise sold, $404,000; operating expenses, $785,122; and net sales, $557,225. What is the company’s gross profit on sales? a. $381,122 b. $227,897 c. $267,135 d. $153,225

Business Professionals of America MULTIPLE CHOICE 5. Beginning merchandise inventory plus net purchases minus ending inventory equals Need More Help? a. net income. Go to glencoeaccounting.glencoe.com and b. gross profit on sales. click on Student Center. Click on Winning c. total expenses. Competitive Events and select Chapter 19. d. cost of goods sold. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

550-581_CH19_868829.indd 579

Chapter 19 Winning Competitive Events

579

10/13/05 10:53:01 PM

C H A P T ER 19 Critical Thinking

Financial Statements for a Corporation

CASE

STUDY

Merchandising Business: Gourmet Food Gifts

ETHICS

Reporting a Mistake

a mattoefr

))

$ )) Communicating ACCOUNTING

580

Real-World Applications and Connections

1. Name the two parts of stockholders’ equity. 2. Explain the difference between gross profit on sales and operating income. 3. Compare the statement of retained earnings and the statement of cash flows, and explain how they are similar. 4. Look at vertical and horizontal analysis of financial statements. Explain why the percentages on comparative income statements and balance sheets add vital information for analysis by owners and managers. 5. Write a statement to explain why financial statements are prepared in this order: income statement, statement of retained earnings, balance sheet, and statement of cash flows. 6. Support the statement that all four financial statements must be examined to obtain an accurate understanding of a corporation’s financial condition. Gourmet Express sells cookies, candies, food baskets, and other gourmet gift items in retail stores and catalogs. Prices increased recently for sugar and chocolate, causing net income to decrease. The manager, Tara, does not want to use lowerpriced ingredients because they may lower the products’ quality. In preparation for the Valentine’s Day rush, Tara has asked you to suggest some ideas for increasing net income. INSTRUCTIONS 1. Identify the items that affect net income. 2. List some possible areas to cut costs. You are an accounting clerk for a major league sports franchise. Your responsibilities do not include any end-of-period activities. You learn that a co-worker made a significant error on the work sheet. It will affect the financial statements. You wonder whether to report the error or assume that someone else will catch it. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Explaining Financial Statements As the CEO of First Rate Products, you regularly present the financial results at stockholders’ meetings. It is imperative that your recently hired accounting clerk, James Van, understands the importance of accurate financial statements. Write a clear, concise memo to him outlining each financial statement’s purpose and its relationship to the company’s overall performance.

Chapter 19 Real-World Applications and Connections

550-581_CH19_868829.indd 580

9/15/05 11:50:35 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Sociability You work for Big League Sports—a professional-sports merchandising company. Your boss, Lily Chang, asks you to make a simple but colorful presentation about trends in professional sports at the annual stockholders’ meeting and reception. INSTRUCTIONS With several classmates, make an outline for the presentation. Decide on topics to cover and visuals to use. Practice presenting to one another. Brainstorm questions for the question-and-answer segment. Give feedback on each speaker’s presentation—both verbal and nonverbal communication skills including eye contact, stance, gestures, facial expressions, and use of visual aids.

Financial Statement Formats The format of financial statements can vary by country. An example is the balance sheet of the German car manufacturer, BMW. It presents noncurrent assets before current assets, and stockholders’ equity before liabilities. INSTRUCTIONS Illustrate how the BMW balance sheet differs from the balance sheet of most U.S. companies as taught in this book.

Your Nest Egg Social Security provides the only retirement funds for many people. Some analysts believe that it is in trouble and could become insolvent. You need to become educated about retirement funding and begin to plan early for it. PERSONAL FINANCE ACTIVITY Use library resources or the Internet to research and compare the advantages and disadvantages of two retirement saving options. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 19.

Statement of Cash Flows Look at PETsMART’s statement of cash flows in Appendix F. It shows cash flows from operating activities, investing activities, and financing activities. It also shows the net cash provided (or used) by each activity. A company’s sources of cash can be revealing. For long term success, a company’s cash inflows must be from operating activities. If its main source of cash was investing activities, it may have sold some of its plant assets. If its main source of cash was financing activities, it may have issued stock or borrowed money. A firm that must sell its assets or borrow money to stay in business cannot do so indefinitely. A company’s use of cash can also be revealing. A large use of cash for investing activities may indicate company expansion. A large use of cash for financing activities may mean that the company paid off its loans. INSTRUCTIONS Use PETsMART’s statements of cash flows in Appendix F to answer these questions. 1. For each of the three years shown, which activity provided the largest source of cash: operating, investing, or financing? 2. For each of the three years shown, which activity used the most cash: operating, investing, or financing?

glencoeaccounting.glencoe.com

550-581_CH19_868829.indd 581

CHAPT E R 1 9

Chapter 19 Real-World Applications and Connections

581

4/6/06 6:28:43 PM

MINI PRACTICE SET 4

Recording Business Transactions in Special Journals IN-TOUCH

Main Task ▲

Use special journals to complete the accounting tasks for In-Touch Electronics.

Summary of Steps ▲

Journalize and post transactions.

▲

Prove cash.

▲

Prepare a schedule of accounts receivable and a schedule of accounts payable.

▲

Prepare a trial balance.

Why It’s Important ▲

Special journals are used more than the general journal for routine transactions.

582

In-Touch Electronics

Electronics

Company Background: Pedro and Justina Cordova own and operate In-Touch Electronics, a merchandising business organized as a corporation. The retail business is a small electronics store providing a unique service to the local community. This husband and wife team has been operating successfully for 10 years. Keeping the Accounting Records for In-Touch Electronics: Since In-Touch Electronics has a large volume of business transactions, the business uses special journals and a general journal. The chart of accounts for In-Touch Electronics appears on the next page. The previous accounting clerk, Manny Canseco, has journalized and posted the business transactions for May 1 through May 15. Those transactions are included in the accounting stationery in the working papers accompanying this textbook. The transactions that follow took place between May 16 and May 31. Your Job Responsibilities: The forms for completing this activity are included in the working papers accompanying this textbook. (1) Record the remaining May transactions in the sales journal (page 18), cash receipts journal (page 15), purchases journal (page 12), cash payments journal (page 14), and general journal (page 7). (2) Post the individual amounts from the five journals to the accounts receivable and accounts payable subsidiary ledgers on a daily basis. (3) Post the individual amounts from the General columns of the cash receipts, purchases, cash payments, and general journals on a daily basis. (4) Foot, prove, total, and rule the special journals. (5) Post the column totals of the special journals to the general ledger accounts. Use the following order for posting: sales journal, cash receipts journal, purchases journal, and cash payments journal.

Mini Practice Set 4

582-585_MPS04_868829.indd 582

9/19/05 4:15:33 PM

In-Touch Electronics (continued) Complete the project using:

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

(6) Prove cash. The balance shown on check stub 899 is $6,109.45. (7) Prepare a schedule of accounts receivable and a schedule of accounts payable. (8) Prepare a trial balance.

CHART OF ACCOUNTS In-Touch Electronics ASSETS

REVENUE

101 105 110 115 120 150 155

401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Store Equipment Office Equipment

LIABILITIES 201 Accounts Payable 205 Sales Tax Payable 210 Employees’ Federal Income Tax Payable 211 Employees’ State Income Tax Payable 212 Social Security Tax Payable 213 Medicare Tax Payable 214 Federal Unemployment Tax Payable 215 State Unemployment Tax Payable STOCKHOLDERS’ EQUITY 301 Capital Stock 302 Retained Earnings 303 Income Summary

Accounts Receivable Subsidiary Ledger LOR MAR MCC SCO TRO

COST OF MERCHANDISE 501 505 510 515

Purchases Transportation In Purchases Discounts Purchases Returns and Allowances

EXPENSES 605 610 615 620 625 630 635

Advertising Expense Bankcard Fees Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Utilities Expense

Accounts Payable Subsidiary Ledger COM DES HIT LAS OFF

Computer Systems Inc. Desktop Wholesalers Hi-Tech Electronics Outlet Laser & Ink-Jet Products Office Suppliers Inc.

Sam Lorenzo Marianne Martino Mark McCormick Sue Ellen Scott Tom Trout

Mini Practice Set 4

582-585_MPS04_868829.indd 583

583

9/19/05 4:15:55 PM

MINI PRACTICE SET 4 (CONTINUED)

Recording Business Transactions in Special Journals Business Transactions: In-Touch Electronics had the following trans-

SMART GUIDE Step–by–Step Instructions: 1. Select the problem set for In-Touch Electronics (MP–4). 2. Rename the company and set the system date. 3. Enter all sales on account using the Sales/Invoicing option. 4. Record and apply any sales returns using the Credit Memos option. 5. Process all cash receipts using the Receipts option. 6. Enter the purchases on account using the Purchases/Receive Inventory option. 7. Record and apply any purchases returns using the Vendor Credit Memos option. 8. Process all cash payments with the Payments option. 9. Use the General Journal Entry option to record the error discovered on May 26. 10. Record the employer’s payroll taxes using the General Journal Entry option. 11. Print a General Journal, Purchases Journal, Cash Disbursements Journal, Sales Journal, and Cash Receipts Journal. 12. Proof your work. 13. Print the following reports: General Ledger, Vendor Ledgers, and Customer Ledgers. 14. Print a General Ledger Trial Balance. 15. Complete the Analyze activity and complete the Audit Test. 16. End the session.

TIP: Remember that you need to change the G/L Account in the Receipts window to enter a cash receipt for the sale of an asset (e.g., supplies, office equipment).

584

actions May 16 through May 31. Date May 16

Transactions Sold $120.00 in merchandise plus 5% sales tax to Sam Lorenzo on account, Sales Slip 607.

17

Received $126.00 from Tom Trout to apply on his account, Receipt 356.

17

Issued Check 892 for $800.00 to Desktop Wholesalers in payment of our account balance.

18

Issued Debit Memo 38 to Laser & Ink Jet Products for our return of $75.00 in merchandise.

19

Wrote Check 893 for $1,200.00 to Computer Systems Inc. to apply on our account.

19

Paid Hi-Tech Electronics Outlet $1,750.00 in full payment of our account balance by issuing Check 894.

19

Issued Check 895 to Office Suppliers, Inc. for $770.00 in full payment of our account balance.

20

Sold $90.00 in office equipment for cash to an employee, Bob Bell, Receipt 357.

20

Purchased $1,200.00 in store equipment on account from Desktop Wholesalers, DW87, n/30.

20

Received $210.00 from Mark McCormick to apply on his account, Receipt 358.

20

Sue Ellen Scott sent us a check for $308.70 in payment of her $315.00 account less a 2% discount, Receipt 359.

21

Purchased $1,500.00 in merchandise on account from Hi-Tech Electronics Outlet, Invoice HT99, terms 2/10, n/30.

21

Marianne Martino sent us a $94.50 check to apply on her account, Receipt 360.

21

Sold $400.00 in merchandise plus 5% sales tax to Mark McCormick on account, Sales Slip 608, terms 2/10, n/30.

22

Issued Check 896 for $1,200.00 to Desktop Wholesalers, in payment of our account.

23

Sold $500.00 in merchandise to Sue Ellen Scott on account plus 5% sales tax, Sales Slip 609, terms 2/10, n/30.

24

Mark McCormick returned merchandise purchased on account, $100.00, plus 5% sales tax, Credit Memo 55.

25

Paid the annual insurance premium of $1,600.00 by issuing Check 897 to Surfside Insurance Co.

26

Discovered that Transportation In account should have been debited last month for $50.00 instead of the Purchases account. Recorded the correcting entry, Memorandum 26.

27

Bought $1,400.00 in merchandise on account from Computer Systems, Inc., CS75, terms 2/10, n/30.

CONTINUE

Mini Practice Set 4

582-585_MPS04_868829.indd 584

9/19/05 4:16:04 PM

In-Touch Electronics (continued)

Date May 28

Transactions (cont.) Sold $200.00 in merchandise on account plus 5% sales tax to Marianne Martino, Sales Slip 610, terms 2/10, n/30.

29

Purchased $150.00 in supplies on account from Office Suppliers Inc., Invoice 9489.

30

Issued Check 898 for $1,500.00 in payment for the monthly rent.

31

Recorded cash sales of $1,200.00 plus 5% sales tax, Tape 22.

31

Recorded bankcard sales of $900.00 plus 5% sales tax, Tape 22.

31

Recorded bank service charge of $25.00 and bankcard fees of $100.00, May bank statement (record compound entry).

31

Wrote Check 899 to pay the payroll of $2,500.00 (gross earnings) for the pay period ended May 31. The following amounts were withheld: employees’ federal income taxes, $400.00; employees’ state income taxes, $50.00; FICA taxes: $155.00 for social security and $36.25 for Medicare.

31

Recorded the employer’s payroll taxes for the May 31 payroll: FICA tax rate, 6.2% for social security and 1.45% for Medicare; federal unemployment tax rate, 0.8%; and state unemployment tax rate, 5.4%.

Analyze

1. Compute the amount by which the Cash in Bank account changed during the month. 2. Identify the two accounts that have the greatest impact on the trial balance total. 3. Calculate the total percentage of tax withholdings for the May 31 payroll.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: 1. Restore the Problem Mini Practice 4.QBB file. 2. Enter all sales on account using the Create Invoices option. 3. Record and apply any sales returns using the Create Credit Memos/ Refunds option. 4. Process all cash receipts. 5. Enter the purchases on account using the Enter Bills option. 6. Record and apply any purchase returns using the Credit option from the Enter Bills window in the Vendors menu. 7. Process all cash payments. 8. Use the Make General Journal Entries option to record the error discovered on May 26. 9. Record the employer’s payroll taxes using the Make General Journal Entries option. 10. Print a Journal report. 11. Proof your work. 12. Print the following reports: General Ledger, Vendor Balance Summary, and Customer Balance Summary. 13. Print a Trial Balance. 14. Complete the Analyze activity and complete the Audit Test. 15. Back up your work.

Mini Practice Set 4

582-585_MPS04_868829.indd 585

585

4/6/06 6:25:33 PM

CHAPTER 20

Completing the Accounting Cycle for a Merchandising Corporation

What You’ll Learn 1.

Journalize closing entries for a merchandising corporation.

2.

Post closing entries to the general ledger accounts.

3.

Prepare a post-closing trial balance.

4.

Describe the steps in the accounting cycle.

Why It’s Important ▲

Like a sole proprietorship, a corporation “cleans the slate” to prepare for the next accounting period.

BEFORE YOU

READ

Predict 1. 2. 3. 4.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business CLOSING THE BOOKS

PETsMART Is your pet like a member of the family? The loyalty that leads to spoiling a cat with a heated cuddle bed or purchasing vitamins for a pet iguana is what contributes to making PETsMART the leader in the retail pet food and supply industry. A strong product mix, combined with pet services like grooming and boarding, have made the company a success. PETsMART’s net income has risen to $68.1 million, more than double the earnings of its nearest competitor. At the end of a fiscal period, companies like PETsMART prepare closing entries to transfer all temporary account balances to a permanent account. The general ledger is then ready for a new accounting period.

What Do You Think? What might happen if temporary accounts were not closed before the next accounting period begins?

586

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 586

9/15/05 12:07:33 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE You have almost completed another accounting cycle—this time for a merchandising company. After the financial statements have been prepared, closing entries are made to get the accounting records ready for the next fiscal period. Closing entries for a merchandising business are similar to those you learned about for a service business. There are just more of them.

Personal Connection 1. In your job are there duties that you perform at the end of a night or week that “wipe the slate clean” or “close out” the day’s activities? 2. If you were preparing the closing entries for your workplace, what accounts do you imagine would be involved?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 20.

glencoeaccounting.glencoe.com

586-611_CH20_868829.indd 587

587

9/15/05 12:07:43 PM

Journalizing Closing Entries

SECTION 1

BEFORE YOU

In Chapter 10 you journalized and posted the closing entries for a sole proprietorship service business. In this chapter you will learn to journalize and post the closing entries for a merchandising corporation. The journalizing procedures are the same.

READ

Main Idea

A corporation’s net income (or net loss) is closed to Retained Earnings.

Steps for Closing the Ledger

Read to Learn…

How Are Closing Entries for a Corporation Different from Closing Entries for a Sole Proprietorship?

for a merchandising corporation. (p. 588) ➤ how to journalize a net loss. (p. 591)

In Chapter 10 you made four entries to close the temporary general ledger accounts of a sole proprietorship:

➤ how to journalize closing entries

1. Close the temporary accounts with credit balances to Income Summary. 2. Close the temporary accounts with debit balances to Income Summary. On Your Mark Work For the Year Ended

ACCT. NO.

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

Figure 20–1 Closing Entries Needed for a Corporation 588

310 401 405 410 501 505 510 515 601 605 630 635 650 655 657 660 665 670 680

TRIAL BALANCE ACCOUNT NAME

Income Summary Sales Sales Discounts Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Returns and Allow. Advertising Expense Bankcard Fees Expense Fed. Corporate Income Tax Exp. Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense

39 40

DEBIT

ADJUSTMENTS

CREDIT

DEBIT

CREDIT

(a) 3 5 3 6 00

320 4 5 0 00 7 3 0 00 2 0 0 0 00 206 7 0 0 00 4 0 3 6 18 1 3 4 0 00 1 8 0 0 00 2 4 5 0 00 4 1 9 9 27 9 8 4 0 00

(d) (c)

1 5 5 00 1 2 5 00

3 5 1 9 25 3 4 8 28 3 8 2 6 83 14 0 0 0 00 29 3 7 4 60 (b) 3 7 1 0 00

2 3 6 4 87 435 7 9 8 28 435 7 9 8 28

7 5 2 6 00

7 5 2 6 00

Net Income

41

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 588

9/15/05 12:08:31 PM

3. Close the balance of Income Summary to capital. 4. Close the withdrawals account to capital.

Income Summary

Only the first three closing entries are made to close the temporary accounts for a merchandising business organized as a corporation. Since a corporation does not have a withdrawals account, the fourth closing entry is not needed. The portion of On Your Mark’s work sheet in Figure 20–1 shows the account balances that are closed. Let’s look closely at each closing entry. 1. Close the accounts with balances in the Credit column of the Income Statement section of the work sheet (revenue and contra cost of merchandise accounts) to Income Summary. After this closing entry has been journalized and posted, the Sales, Purchases Discounts, and Purchases Returns and Allowances accounts have zero balances. GENERAL JOURNAL DATE 1 2 3 4 5

DESCRIPTION

PAGE

POST. REF.

20-Closing Entries Dec. 31 Sales Purchases Discounts Purchases Returns and Allow. Income Summary

DEBIT

Credit

Adj. 3,536.00

Clos. 323,590.00 Sales

Debit  Clos. 320,450.00

Credit
Bal. 320,450.00

Purchases Discounts Debit  Clos. 1,340.00

Credit
Bal. 1,340.00

Purchases Returns and Allowances

23

CREDIT 1

320 4 5 0 00 1 3 4 0 00 1 8 0 0 00

Debit

Debit  Clos. 1,800.00

Credit
Bal. 1,800.00

2 3 4

323 5 9 0 00

5

Athletic Wear Sheet December 31, 20-ADJUSTED TRIAL BALANCE DEBIT

CREDIT

3 5 3 6 00

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

CREDIT

3 5 3 6 00 320 4 5 0 00

7 3 0 00 2 0 0 0 00 206 7 0 0 00 4 0 3 6 18

20

320 4 5 0 00

21

7 3 0 00 2 0 0 0 00 206 7 0 0 00 4 0 3 6 18 1 3 4 0 00 1 8 0 0 00

22 23 24 25

1 3 4 0 00 1 8 0 0 00

26

1 Close temporary accounts with

balances in the Income Statement Credit column to Income Summary.

27

2 4 5 0 00 2 4 5 0 00 4 1 9 9 27 4 1 9 9 27 9 9 9 5 00 9 9 9 5 00 1 2 5 00 1 2 5 00 3 5 1 9 25 3 5 1 9 25 3 4 8 28 3 4 8 28 3 8 2 6 83 3 8 2 6 83 14 0 0 0 00 14 0 0 0 00 29 3 7 4 60 29 3 7 4 60 3 7 1 0 00 3 7 1 0 00 2 3 6 4 87 2 3 6 4 87 435 9 5 3 28 435 9 5 3 28 290 9 1 5 28 323 5 9 0 00 145 0 3 8 00 112 3 6 3 28 32 6 7 4 72 32 6 7 4 72 323 5 9 0 00 323 5 9 0 00 145 0 3 8 00 145 0 3 8 00

28 29 30 31 32

2 Close temporary accounts with

balances in the Income Statement Debit column to Income Summary.

33 34 35 36 37

3 Close Income Summary to Retained Earnings by the amount of the net income or loss.

38 39 40 41

Figure 20–1 Closing Entries Needed for a Corporation (continued)

Section 1 Journalizing Closing Entries

586-611_CH20_868829.indd 589

589

9/15/05 12:08:38 PM

Income Summary Debit

Credit

Adj. 3,536.00 Clos. 287,379.28

Clos. 323,590.00

Purchases Debit  Bal. 206,700.00

Credit  Clos. 206,700.00

Bankcard Fees Expense Debit  Bal. 4,199.27

Credit  Clos. 4,199.27

Maintenance Expense Debit  Bal. 3,519.25

Credit  Clos. 3,519.25

Rent Expense Debit  Bal. 14,000.00

Credit  Clos. 14,000.00

Utilities Expense Debit  Bal. 2,364.87

Credit  Clos. 2,364.87

Sales Discounts Debit  Bal. 730.00

Credit  Clos. 730.00

Sales Returns and Allowances Debit  Bal. 2,000.00

Advertising Expense

Transportation In Debit  Bal. 4,036.18

Credit  Clos. 4,036.18

Debit  Bal. 2,450.00

Federal Corporate Income Tax Expense Debit  Bal. 9,995.00

Credit  Clos. 9,995.00

Credit  Clos. 348.28

Debit  Bal. 125.00

Credit  Clos. 29,374.60

Credit  Clos. 125.00

Payroll Tax Expense Debit  Bal. 3,826.83

Credit  Clos. 3,826.83

Supplies Expense

Salaries Expense Debit  Bal. 29,374.60

Credit  Clos. 2,450.00

Insurance Expense

Miscellaneous Expense Debit  Bal. 348.28

Credit  Clos. 2,000.00

Debit  Bal. 3,710.00

Credit  Clos. 3,710.00

2. Close the accounts with balances in the Debit column of the Income Statement section of the work sheet (contra revenue, cost of merchandise, and expense accounts) to Income Summary. After this closing entry has been journalized and posted, the contra revenue, cost of merchandise, and expense accounts have zero balances. Income Summary now has a credit balance of $32,674.72.

$ 323,590.00  3,536.00  287,379.28 $ 32,674.72

closing credit adjustment debit closing debit credit balance

3. Close Income Summary to Retained Earnings. Income Summary Debit

Credit

Adj. 3,536.00 Clos. 287,379.28 Clos. 32,674.72

Clos. 323,590.00

Retained Earnings Debit 

Credit  Bal. 19,771.19 Clos. 32,674.72 Bal. 52,445.91

After the entry to close Income Summary to Retained Earnings has been journalized and posted, Income Summary has a zero balance. The balance of Retained Earnings is increased to $52,445.91. 590

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 590

4/6/06 6:29:23 PM

GENERAL JOURNAL DATE

6

Dec.

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Dec.

23

DESCRIPTION

POST. REF.

31 Income Summary Sales Discounts Sales Returns and Allow. Purchases Transportation In Advertising Expense Bankcard Fees Expense Fed. Corp. Inc. Tax Expense Insurance Expense Maintenance Expense Miscellaneous Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense 31 Income Summary Retained Earnings

23

PAGE DEBIT

CREDIT

287 3 7 9 28

6

2 206 4 2 4 9 3 3 14 29 3 2

730 000 700 036 450 199 995 125 519 348 826 000 374 710 364

00 00 00 18 00 27 00 00 25 28 83 00 60 00 87

32 6 7 4 72

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

32 6 7 4 72

24

23 24

Closing Entry to Transfer a Net Loss How Do You Close a Net Loss to Retained Earnings? Sometimes businesses incur net losses. Suppose that after posting the first two entries closing the temporary accounts, the Income Summary account is as shown. Before it is closed, Income Summary has a debit balance of $5,000.00:

Income Summary Debit

Credit

Adj. 3,612.00 Clos. 65,178.00

Clos. 63,790.00

$ 3,612.00 adjustment debit  65,178.00 closing debit
63,790.00 closing credit $ 5,000.00 debit balance To close Income Summary, credit it for $5,000 and debit Retained Earnings for $5,000. The net loss amount decreases the earnings the business retains. This closing entry is recorded in the general journal as follows: GENERAL JOURNAL DATE

DEBIT

23

Dec.

23 24

31 Retained Earnings Income Summary

1

5 0 0 0 00

22

5 0 0 0 00

READ

In Your Own Words

CREDIT

Closing Entries

1

22

DESCRIPTION

POST. REF.

PAGE

AS YOU

23

Closing In your own words, explain the concept of closing the ledger.

24

Section 1 Journalizing Closing Entries

586-611_CH20_868829.indd 591

591

9/15/05 12:08:57 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Using a diagram like this one, describe the step-by-step process for journalizing a merchandising corporation’s closing entries. Add or remove answer boxes as needed.

*OURNALIZINGA-ERCHANDISING#ORPORATIONS#LOSING%NTRIES

Do the Math The closing debit entry to the Income Summary account was $263,000, and the closing credit entry was $300,000. If the Income Summary account had a $42,000 credit balance after these entries, was the inventory adjustment a debit or credit? What was the amount?

Problem 20–1 Identifying Accounts Affected by Closing Entries The following account names appear in the chart of accounts of Larkin’s Department Store. Accounts Receivable Bankcard Fees Expense Capital Stock Cash in Bank Equipment Fed. Corp. Income Tax Expense Fed. Corp. Income Tax Payable Income Summary Insurance Expense Merchandise Inventory Miscellaneous Expense Prepaid Insurance

Purchases Purchases Discounts Purchases Returns and Allowances Retained Earnings Sales Sales Discounts Sales Returns and Allowances Sales Tax Payable Supplies Supplies Expense Transportation In Utilities Expense

Instructions Use the form in your working papers to answer the following questions about each account. Assume that all accounts have normal balances. 1. Is the account affected by a closing entry? 2. During closing, is the account debited or credited? 3. During closing, is Income Summary debited or credited? 592

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 592

9/15/05 12:09:01 PM

Posting Closing Entries

SECTION 2

Closing entries recorded in the general journal are posted to the general ledger.

Closing the General Ledger Figure 20–2 shows the portion of On Your Mark’s general ledger affected by the closing process after the closing entries have been posted. Write the term Closing Entry (abbreviated Clos. Ent. here) for each posting in the Description column of the general ledger account.

DATE

20-Dec.

DESCRIPTION

POST. REF.

ACCOUNT NO. 305 BALANCE DEBIT

1 Balance ✓ 31 Clos. Ent. G23

CREDIT

DEBIT

CREDIT

19 7 7 1 19 52 4 4 5 91

32 6 7 4 72

ACCOUNT Income Summary

READ

Main Idea

How Do You Close a Merchandising Corporation’s General Ledger?

ACCOUNT Retained Earnings

BEFORE YOU

After posting the closing entries, prepare a postclosing trial balance.

Read to Learn… ➤ how to post the

closing entries for a merchandising corporation. (p. 593) ➤ how to prepare a postclosing trial balance for a merchandising corporation. (p. 597) ➤ about a review of the accounting cycle for a merchandising business. (p. 598)

ACCOUNT NO. 310 BALANCE

DATE

DESCRIPTION

POST. REF.

20-Dec. 31 31 31 31

Adj. Ent Clos. Ent. Clos. Ent. Clos. Ent.

G22 3 5 3 6 00 323 5 9 0 00 G23 G23 287 3 7 9 28 G23 32 6 7 4 72

DEBIT

CREDIT

DEBIT

CREDIT

3 5 3 6 00 320 0 5 4 00 32 6 7 4 72

AS YOU

READ

Instant Recall ACCOUNT Sales DATE

20-Dec.

DESCRIPTION

ACCOUNT NO. 401 POST. REF.

BALANCE DEBIT

✓ 1 Balance S12 31 CR13 31 31 Clos. Ent. G23 320 4 5 0 00

CREDIT

DEBIT

10 7 5 0 00 9 7 0 0 00

CREDIT

300 0 0 0 00 310 7 5 0 00 320 4 5 0 00

Posting to the General Ledger Begin with the date, and continue posting by moving from the left to the right. Remember to enter the account number in the Posting Reference column of the general journal.

Figure 20–2 Partial General Ledger at the End of the Fiscal Period Section 2 Posting Closing Entries

586-611_CH20_868829.indd 593

593

9/15/05 12:09:05 PM

ACCOUNT Sales Discounts DATE

20-Dec.

DESCRIPTION

ACCOUNT NO. 405 BALANCE

POST. REF.

DEBIT

1 Balance ✓ 31 CR13 31 Clos. Ent. G23

CREDIT

DEBIT

7 0 0 00 7 3 0 00

3 0 00 7 3 0 00

ACCOUNT Sales Returns and Allowances DATE

20-Dec.

CREDIT

DESCRIPTION

POST. REF.

1 Balance ✓ 4 G20 31 Clos. Ent. G23

ACCOUNT NO. 410 BALANCE

DEBIT

CREDIT

DEBIT

CREDIT

1 8 5 0 00 2 0 0 0 00

1 5 0 00 2 0 0 0 00

ACCOUNT Purchases DATE

20-Dec.

DESCRIPTION

ACCOUNT NO. 501 POST. REF.

BALANCE DEBIT

CREDIT

DEBIT

CREDIT

1 Balance ✓ 190 0 0 0 00 1 3 0 0 00 191 3 0 0 00 19 CP14 206 7 0 0 00 31 P12 15 4 0 0 00 206 7 0 0 00 31 Clos. Ent. G23

ACCOUNT Transportation In DATE

20-Dec.

DESCRIPTION

POST. REF.

1 Balance ✓ 24 CP14 31 Clos. Ent. G23

ACCOUNT NO. 505 BALANCE DEBIT

CREDIT

DEBIT

3 7 6 1 18 4 0 3 6 18

2 7 5 00 4 0 3 6 18

ACCOUNT Purchases Discounts DATE

20-Dec.

DESCRIPTION

CREDIT

POST. REF.

1 Balance ✓ 31 CP14 31 Clos. Ent. G23

ACCOUNT NO. 510 BALANCE DEBIT

CREDIT

DEBIT

1 4 0 00

CREDIT

1 2 0 0 00 1 3 4 0 00

1 3 4 0 00

Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)

594

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 594

9/15/05 12:09:16 PM

ACCOUNT Purchases Returns and Allowances DATE

20-Dec.

DESCRIPTION

ACCOUNT NO. 515 BALANCE

POST. REF.

DEBIT

1 Balance ✓ 16 G21 31 Clos. Ent. G23

CREDIT

DEBIT

CREDIT

1 6 0 0 00 1 8 0 0 00

2 0 0 00 1 8 0 0 00

ACCOUNT Advertising Expense DATE

20-Dec.

DESCRIPTION

POST. REF.

ACCOUNT NO. 601 BALANCE DEBIT

CREDIT

1 Balance ✓ 31 Clos. Ent. G23

DEBIT

CREDIT

2 4 5 0 00 2 4 5 0 00

ACCOUNT Bankcard Fees Expense DATE

20-Dec.

DESCRIPTION

POST. REF.

ACCOUNT NO. 605 BALANCE

DEBIT

✓ 1 Balance CP14 31 31 Clos. Ent. G23

CREDIT

DEBIT

CREDIT

4 1 2 4 27 4 1 9 9 27

7 5 00 4 1 9 9 27

ACCOUNT Federal Corporate Income Tax Expense DATE

20-Dec.

DESCRIPTION

POST. REF.

1 Balance ✓ 31 Adj. Ent. G22 31 Clos. Ent. G23

ACCOUNT NO. 630 BALANCE

DEBIT

CREDIT

DEBIT

9 8 4 0 00 9 9 9 5 00

1 5 5 00 9 9 9 5 00

ACCOUNT Insurance Expense DATE

DESCRIPTION

CREDIT

POST. REF.

20-Dec. 31 Adj. Ent. G22 31 Clos. Ent. G23

ACCOUNT NO. 635 BALANCE DEBIT

CREDIT

DEBIT

1 2 5 00

CREDIT

1 2 5 00 1 2 5 00

Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)

Section 2 Posting Closing Entries

586-611_CH20_868829.indd 595

595

9/15/05 12:09:23 PM

ACCOUNT Maintenance Expense DATE

20-Dec.

DESCRIPTION

ACCOUNT NO. 650 BALANCE

POST. REF.

DEBIT

CREDIT

✓ 1 Balance 31 Clos. Ent. G23

DEBIT

CREDIT

3 5 1 9 25 3 5 1 9 25

ACCOUNT Miscellaneous Expense DATE

20-Dec.

DESCRIPTION

POST. REF.

ACCOUNT NO. 655 BALANCE

DEBIT

✓ 1 Balance CP14 31 31 Clos. Ent. G23

CREDIT

DEBIT

CREDIT

3 2 8 28 3 4 8 28

2 0 00 3 4 8 28

ACCOUNT Payroll Tax Expense DATE

20-Dec.

DESCRIPTION

ACCOUNT NO. 657 BALANCE

POST. REF.

DEBIT

CREDIT

✓ 1 Balance 31 Clos. Ent. G23

DEBIT

CREDIT

3 8 2 6 83 3 8 2 6 83

ACCOUNT Rent Expense DATE

20-Dec.

DESCRIPTION

POST. REF.

✓ 1 Balance CP14 31 31 Clos. Ent. G23

ACCOUNT NO. 660 BALANCE DEBIT

CREDIT

DEBIT

12 0 0 0 00 14 0 0 0 00

2 0 0 0 00 14 0 0 0 00

ACCOUNT Salaries Expense DATE

20-Dec.

DESCRIPTION

CREDIT

POST. REF.

✓ 1 Balance CP14 31 31 Clos. Ent. G23

ACCOUNT NO. 665 BALANCE DEBIT

CREDIT

DEBIT

CREDIT

25 3 7 4 60 29 3 7 4 60

4 0 0 0 00 29 3 7 4 60

Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued) 596

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 596

9/15/05 12:09:28 PM

ACCOUNT Supplies Expense DATE

DESCRIPTION

POST. REF.

20-Dec. 31 Adj. Ent. G22 31 Clos. Ent. G23

ACCOUNT NO. 670 BALANCE DEBIT

CREDIT

DEBIT

3 7 1 0 00

3 7 1 0 00 3 7 1 0 00

ACCOUNT Utilities Expense DATE

20-Dec.

DESCRIPTION

CREDIT

POST. REF.

ACCOUNT NO. 680 BALANCE DEBIT

✓ 1 Balance 31 Clos. Ent. G23

CREDIT

DEBIT

CREDIT

2 3 6 4 87 2 3 6 4 87

Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)

Preparing a Post-Closing Trial Balance How Do You Prepare a Post-Closing Trial Balance? A post-closing trial balance is prepared at the end of the accounting period to prove that the general ledger accounts are in balance after all adjusting and closing entries have been posted. Figure 20–3 shows the postclosing trial balance for On Your Mark. On Your Mark Athletic Wear Post-Closing Trial Balance December 31, 20-Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Delivery Equipment Office Equipment Store Equipment Accounts Payable Fed. Corp. Income Tax Payable Employees’ Fed. Income Tax Payable Employees’ State Income Tax Payable Social Security Tax Payable Medicare Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Capital Stock Retained Earnings Totals

15 10 81 1 1 19 9 5

179 404 385 839 375 831 825 200

00 00 00 00 00 00 00 00

145 0 3 8 00

AS YOU

READ

Key Point Post-Closing Trial Balance The post-closing trial balance and the balance sheet list the same account balances.

Connect to…

HISTORY

13 8 5 0 155 640 80 248 58 18 114 2 428 75 0 0 0 52 4 4 5 145 0 3 8

00 00 00 00 00 00 36 73 00 00 91 00

After the stock market crash in 1929 and the Great Depression that followed, Congress created the Securities and Exchange Commission (SEC) in 1934 to protect investors.

Figure 20–3 Post-Closing Trial Balance

Section 2 Posting Closing Entries

586-611_CH20_868829.indd 597

597

9/15/05 12:09:34 PM

AS YOU

Completing the Accounting Cycle for a Merchandising Business

READ

Compare and Contrast

What Is the Accounting Cycle for a Merchandising Business?

Corporation and Sole Proprietorship How is closing the general ledger for these forms of businesses similar? How is it different?

You have completed the study of the accounting cycle for a merchandising business organized as a corporation, which consists of the following steps: 1. 2. 3. 4. 5. 6. 7.

Collect and verify source documents. Analyze each business transaction. Journalize each transaction. Post to the general and subsidiary ledgers. Prepare a trial balance. Complete a work sheet. Prepare the financial statements—income statement, statement of retained earnings, and balance sheet. Publicly held corporations also prepare a statement of cash flows. 8. Journalize and post the adjusting entries. 9. Journalize and post the closing entries. 10. Prepare a post-closing trial balance. The accounting cycle for a service and a manufacturing business follows the same steps. Also, regardless of how a business is organized—sole proprietorship, partnership, or corporation—the basic steps of the accounting cycle are the same. Figure 20–4 illustrates the accounting cycle. !NALYZEEACH TRANSACTION

#OLLECTANDVERIFY SOURCEDOCUMENTS




"1 / /

*OURNALIZE EACHTRANSACTION

0OSTTOTHE GENERALAND SUBSIDIARYLEDGERS

 ,
Ê "1,


, /


"1 /

 6"

/

,

*/



 ",
1



, /



  ,

 



*"-/‡ "-  /,
Ê



  ,
Ê "1,


0REPAREA POST CLOSING TRIALBALANCE

Figure 20–4 The Accounting Cycle

  ,

*OURNALIZEAND POSTTHECLOSING ENTRIES

  ,
Ê "1,


/,
Ê







7",Ê-

/

 " -/
/  /

0REPAREA TRIALBALANCE

-/
/  /Ê"Ê , /
 Ê
,  -

  ,

*OURNALIZEAND POSTTHEADJUSTING ENTRIES





-

/

0REPAREA WORKSHEET

0REPAREFINANCIAL STATEMENTS

The accounting system used, whether manual or computerized, does not affect the steps in the accounting cycle. In a computerized accounting system, however, the computer performs many of the routine procedures such as posting. 598

Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation

586-611_CH20_868829.indd 598

4/6/06 6:29:33 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Using a diagram like this one, describe the step-bystep process for posting a merchandising corporation’s closing entries. Add or remove answer boxes as needed.

0OSTINGA-ERCHANDISING#ORPORATIONS#LOSING%NTRIES

Do the Math Totals on the post-closing trial balance were assets, $156,000, and liabilities, $75,000. If the ending balance of Retained Earnings was $45,000, what was the capital stock account’s ending balance?

Problem 20–2 Analyzing a Source Document Instructions Review the source document and prepare the journal entry to record this transaction in your working papers. Your Backpack Inc. uses a cash payments journal to record disbursements.

MEMORANDUM

Your Backpack Inc.

No. 42

29000 White Road Cold Springs, TX 77282-4513

TO: FROM: DATE: SUBJECT:

Robert Chan, Chief Accountant James Perkins, President July 12, 20-New Storage Facility Rent

Would you please make a check out to Warehouse Inc. for $750. The check is for the new storage facility we are renting. Please mail the check to: Mr. James Skiller, Controller Warehouse Inc. 7576 County Line Highway Crossplains, TX 77361-8411

Problem 20–3 Organizing the Steps in the Accounting Cycle Instructions List the following steps of the accounting cycle in their proper order. Use the form provided in your working papers or a separate sheet of paper. Analyzing business transactions Collecting and verifying source documents Completing the work sheet Journalizing business transactions Journalizing and posting adjusting entries

Journalizing and posting closing entries Posting journal entries to ledgers Preparing financial statements Preparing a post-closing trial balance Preparing a trial balance Section 2 Posting Closing Entries

586-611_CH20_868829.indd 599

599

9/15/05 12:09:50 PM

Summary

CH A P T ER 2 0 Key Concepts

1. The information for journalizing closing entries comes from the Income Statement section of the work sheet. Only three steps are necessary to close the temporary accounts of a corporate merchandising business. a. Close all temporary accounts with credit balances to Income Summary. GENERAL JOURNAL DATE 1 2

20-Date

3 4 5

DESCRIPTION

POST. REF.

Closing Entries Sales Purchases Discounts Purchases Returns and Allow. Income Summary

XX

PAGE DEBIT

CREDIT 1

xx x x x xx xx x x x xx xx x x x xx

2 3 4

xx x x x xx

5

6

6

b. Close all temporary accounts with debit balances to Income Summary. GENERAL JOURNAL DATE

6

Date

7 8 9 10 11 12 13

DESCRIPTION

POST. REF.

Income Summary Sales Discounts Sales Returns and Allow. Purchases Transportation In Expense Account Expense Account Expense Account

PAGE DEBIT

XX

CREDIT

xx x x x xx

6

xxx xxx xxx xxx xxx xxx xxx

xx xx xx xx xx xx xx

14

7 8 9 10 11 12 13 14

c. Close the balance of Income Summary to the Retained Earnings account. GENERAL JOURNAL DATE

PAGE DEBIT

XX

CREDIT

Closing Entries

1

22

DESCRIPTION

POST. REF.

Date

23 24

Income Summary Retained Earnings

1

x x x x xx

22

x x x x xx

23 24

2. After you have recorded closing entries in the general journal, post them to the general ledger. Write Closing Entry in the Description column of the general ledger account. Refer to Figure 20–2 on pages 593–597 to review a partial general ledger at the end of the accounting period.

600

Chapter 20 Summary

586-611_CH20_868829.indd 600

9/15/05 12:09:56 PM

Summary

3. A post-closing trial balance is prepared at the end of the accounting period to prove that the general ledger accounts are in balance, that is, their debits equal their credits. The following is an example of a post-closing trial balance.

CHAPT E R 20

On Your Mark Athletic Wear Post-Closing Trial Balance December 31, 20-15 10 81 1 1 19 9 5

Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Delivery Equipment Office Equipment Store Equipment Accounts Payable Fed. Corp. Income Tax Payable Employees’ Fed. Income Tax Payable Employees’ State Income Tax Payable Social Security Tax Payable Medicare Tax Payable Fed. Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Capital Stock Retained Earnings Totals

179 404 385 839 375 831 825 200

00 00 00 00 00 00 00 00

145 0 3 8 00

13 8 5 0 155 640 80 248 58 18 114 2 428 75 0 0 0 52 4 4 5 145 0 3 8

00 00 00 00 00 00 36 73 00 00 91 00

4. The basic accounting cycle is the same whether • the business is a service provider or merchandiser • the business is organized as a sole proprietorship, corporation, or partnership • the business uses a manual or computerized accounting system The following illustrates the complete accounting cycle. !NALYZEEACH TRANSACTION

#OLLECTANDVERIFY SOURCEDOCUMENTS




"1 / /

*OURNALIZE EACHTRANSACTION  ,
Ê "1,


, /

0OSTTOTHE GENERALAND SUBSIDIARYLEDGERS




"1 /

 6"

/

,

*/



 ",
1



, /



  ,

 



*"-/‡ "-  /,
Ê



  ,
Ê "1,


0REPAREA POST CLOSING TRIALBALANCE

  ,

*OURNALIZEAND POSTTHECLOSING ENTRIES

  ,
Ê "1,




/,
Ê



 7",Ê-

/

 " -/
/  /

0REPAREA TRIALBALANCE

-/
/  /Ê"Ê , /
 Ê
,  -

  ,

*OURNALIZEAND POSTTHEADJUSTING ENTRIES





-

/

0REPAREA WORKSHEET

0REPAREFINANCIAL STATEMENTS

Chapter 20 Summary

586-611_CH20_868829.indd 601

601

9/15/05 12:10:05 PM

C H A P T ER 2 0 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

Journalizing the Closing Entries a. Which account(s) are used to close temporary accounts with debit and credit balances? b. How are temporary accounts with debit balances closed? Posting the Closing Entries a. What is written in the Description column of the general ledger account as the closing entries are posted? b. What is entered in the Posting Reference column of the general ledger account? Post-Closing Trial Balance a. What is the purpose of preparing a post-closing trial balance? b. Does the Income Summary account appear on the post-closing trial balance? Why or why not? Accounting Cycle a. Name the 10 steps in the accounting cycle. b. Which tasks in the accounting cycle are performed automatically in a computerized accounting system?

Apply Key Terms The following key terms were introduced in Chapter 10. Let’s review the terms as they relate to a merchandising corporation such as PETsMART. What differences exist between the closing entries for a sole proprietorship and the closing entries for a merchandising corporation? Use the following terms in your explanation. closing entries permanent accounts

602

temporary accounts

Chapter 20 Review and Activities

586-611_CH20_868829.indd 602

4/6/06 6:29:42 PM

Computerized Accounting CHAPT E R 20 Closing the Fiscal Year Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Closing a fiscal year

• Journalize the entries to close the revenue, expense, Income Summary, and Withdrawals accounts. • Post the closing entries.

• Closing the fiscal year is performed only if you want to clear income and expense accounts at the end of the fiscal year. • If you have selected the closing option, the software journalizes closing entries.

Preparing a post-closing trial balance

• After the closing entries have been posted to the ledger, prepare a trial balance to verify the equality of debits and credits. • All expense and revenue accounts should have zero balances.

• A post-closing trial balance can be printed to verify that all revenue and expense accounts have been closed.

Q&A Peachtree Question

Answer

What tasks should I perform before closing a fiscal year?

1. Post and print all journal entries and reports before you close the fiscal year. 2. Back up all files before closing. Closing the fiscal year cannot be reversed.

How do I close the fiscal year?

1. From the Tasks menu, select System. 2. Choose Year-End Wizard. 3. You will be prompted if any procedures need to be completed before the system continues the closing process.

QuickBooks Q & A QuickBooks Question

Answer

What tasks should I perform before closing a fiscal year?

1. Post and print all journal entries and reports before you close the fiscal year. 2. Back up the company file before closing.

How do I close the fiscal year?

1. From the Company menu, select Set Up Users. 2. Click Closing Date. 3. Enter the date on which you want to close your books and enter a password.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 20 Computerized Accounting

586-611_CH20_868829.indd 603

603

9/15/05 12:10:26 PM

Problems

C H A P T ER 2 0 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 20–4 1. Select the problem set for Sunset Surfwear (Prob. 20–4). 2. Rename the company and set the system date. 3. Choose System from the Tasks menu and then select Year-End Wizard to close the fiscal year. 4. Print a post-closing trial balance. 5. Complete the Analyze activity. 6. End the session.

TIP: Choose the General Ledger Trial Balance report whenever you are instructed to print a PostClosing Trial Balance.

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 20–4 Journalizing Closing Entries The following amounts appeared in the Income Statement section of Sunset Surfwear’s work sheet.

Instructions In your working papers, record the closing entries for the year ended December 31. Start with general journal page 13. INCOME STATEMENT

ACCT. NO.

13 14 15 16 17 18 19 20 21 22 23 24 25 26

310 401 405 410 501 505 510 515 625 635 650 655 665 675

ACCOUNT NAME

Income Summary Sales Sales Discounts Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Returns and Allowances Federal Corporate Income Tax Exp. Insurance Expense Miscellaneous Expense Rent Expense Supplies Expense Utilities Expense

27 28

Net Income

29

DEBIT

CREDIT

7 0 0 0 00 90 0 0 0 00 1 2 25 3

0 0 0 00 4 0 0 00 0 0 0 00 0 0 0 00 5 0 0 00 1 5 0 0 00

5 5 3 2 00 3 0 0 00 6 0 0 0 00 12 0 0 0 00 4 5 0 00 14 0 0 0 00 69 6 8 2 00 99 0 0 0 00 29 3 1 8 00 99 0 0 0 00 99 0 0 0 00

30

Analyze

604

Identify the effect of the closing entries on the Retained Earnings account.

Chapter 20 Problems

586-611_CH20_868829.indd 604

9/15/05 12:10:32 PM

Problems Problem 20–5 Journalizing and Posting Closing Entries The following account balances appeared in the Income Statement section of the work sheet of Shutterbug Cameras.

Instructions 1. Journalize the closing entries for the year ended December 31. Start with page 14 of a general journal (in your working papers). 2. Post the closing entries to the general ledger accounts, which are included in your working papers.

20 21 22 23 24 25 26 27 28 29 30 31

INCOME STATEMENT

ACCT. NO.

ACCOUNT NAME

310 401 410 501 505 510 515 620 645 650 660 670

Income Summary Sales Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Returns and Allowances Federal Corporate Income Tax Exp. Miscellaneous Expense Rent Expense Supplies Expense Utilities Expense

32 33

Net Income

34

DEBIT

CREDIT

CHAPT E R 20 SMART GUIDE Step–by–Step Instructions: Problem 20–5 1. Select the problem set for Shutterbug Cameras (Prob. 20–5). 2. Rename the company and set the system date. 3. Close the fiscal year. 4. Print a post-closing trial balance. 5. Complete the Analyze activity. 6. End the session.

QuickBooks

4 0 0 0 00 150 0 0 0 00 5 0 0 0 00 90 0 0 0 00 5 0 0 0 00

PROBLEM GUIDE Step–by–Step Instructions: Problem 20–5

1 0 0 0 00 1 5 0 0 00 4 7 0 0 00 3 0 0 00 6 0 0 0 00 1 6 3 0 00 3 0 0 0 00 119 6 3 0 00 152 5 0 0 00 32 8 7 0 00 152 5 0 0 00 152 5 0 0 00

1. Restore the Problem 20-5.QBB file. 2. Enter the closing entries. 3. Print a post-closing trial balance. 4. Complete the Analyze activity. 5. Back up your work.

35

Analyze

Describe what would happen if the accountant for Shutterbug Cameras made a mistake and did not close the Transportation In account.

Problem 20–6 Identifying Accounts for Closing Entries A partial list of the accounts used by Cycle Tech Bicycles appears on page 606. All of the accounts have nonzero balances.

CONTINUE

Chapter 20 Problems

586-611_CH20_868829.indd 605

605

4/6/06 6:29:50 PM

Problems

C H A P T ER 2 0

SMART GUIDE Step–by–Step Instructions: Problem 20–6 1. Select the problem set for Cycle Tech Bicycles (Prob. 20–6). 2. Rename the company and set the system date. 3. Print a Chart of Accounts report. 4. List the accounts that will be debited and those that will be credited when closed. 5. Complete the Analyze activity. 6. End the session.

General Ledger 101 Cash in Bank 650 Miscellaneous Expense 125 Merchandise Inventory 665 Supplies Expense 215 Sales Tax Payable 505 Transportation In 305 Retained Earnings 401 Sales 405 Sales Discounts 310 Income Summary 501 Purchases 515 Purchases Returns and Allowances 601 Advertising Expense 625 Federal Corporate Income Tax Expense 657 Rent Expense 135 Prepaid Insurance

Instructions In your working papers, list all account numbers and names for accounts that will be debited when closed. Next, list all account numbers and names for accounts that will be credited when closed.

Analyze SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 20–7 1. Select the spreadsheet template for Problem 20–7. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet

Problem 20–7 Completing End-of-Period Activities The general ledger accounts for River’s Edge Canoe & Kayak as of December 31, the end of the period, appear in the working papers.

Instructions In your working papers: 1. Prepare a trial balance on a ten-column work sheet. 2. Complete the work sheet. Use the following adjustment information. Merchandise inventory, December 31 $20,000 Supplies inventory, December 31 900 Unexpired insurance, December 31 1,800 Total federal corporate income taxes for the year 2,965 3. Prepare an income statement from the work sheet information. 4. Prepare a statement of retained earnings. 5. Prepare a balance sheet. 6. Journalize and post the adjusting entries. Begin on general journal page 14. 7. Journalize and post the closing entries. 8. Prepare a post-closing trial balance.

Analyze

606

Examine your list. Determine whether it contains all of the accounts. If it does not, explain why.

Conclude whether the company made a profit for the year.

Chapter 20 Problems

586-611_CH20_868829.indd 606

9/15/05 12:10:45 PM

Problems CHALLENGE PROBLEM

CHAPT E R 20

Problem 20–8 Preparing Adjusting and Closing Entries

In the middle of the end-of-period activities, the accountant for Buzz Newsstand was called away because of an illness in the family. Before leaving, the accountant prepared the work sheet and the financial statements. However, the business manager can locate only the trial balance shown here (before adjustments) and the income statement shown on page 608.

Instructions In your working papers: 1. Journalize the adjusting and closing entries on page 16 of the general journal. 2. Using the information provided, prepare a post-closing trial balance. Buzz Newsstand Trial Balance, Before Adjustments December 31, 20-101 115 130 135 140 145 201 204 215 301 305 310 401 410 501 505 510 515 601 625 635 650 660 665 675

Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Delivery Truck Accounts Payable Fed. Corp. Income Tax Pay. Sales Tax Payable Capital Stock Retained Earnings Income Summary Sales Sales Returns and Allowances Purchases Transportation In Purchases Discounts Purchases Returns and Allowances Advertising Expense Fed. Corp. Income Tax Expense Insurance Expense Miscellaneous Expense Salaries Expense Supplies Expense Utilities Expense Totals

12 6 64 3 5 46

035 106 800 916 400 106

00 00 00 00 00 00 4 6 9 0 00 4 1 6 00 40 0 0 0 00 24 6 0 3 00 299 1 5 6 00

9 5 0 0 00 168 6 2 4 00 8 2 3 6 00 2 9 5 0 00 2 1 0 8 00 4 0 0 0 00 12 5 0 0 00 1 6 0 0 00 26 9 0 0 00 4 2 0 0 00 373 9 2 3 00

SMART GUIDE Step–by–Step Instructions: Problem 20–8 1. Select the problem set for Buzz Newsstand (Prob. 20–8). 2. Rename the company and set the system date. 3. Print a Working Trial Balance to help you prepare the adjustments. 4. Record the adjustments using the General Journal Entry option. 5. Print a General Journal report and proof your work. 6. Complete the Analyze activity. 7. Close the fiscal year. 8. Print a post-closing trial balance. 9. End the session.

TIP: Peachtree automatically updates the general ledger accounts when you close the fiscal year.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 20–8 1. Restore the Problem 20-8.QBB file. 2. Print a Trial Balance. 3. Record the adjustments. 4. Print a Journal report. 5. Complete the Analyze activity. 6. Enter the closing entries. 7. Print a post-closing trial balance. 8. Back up your work.

373 9 2 3 00

CONTINUE Chapter 20 Problems

586-611_CH20_868829.indd 607

607

4/6/06 6:29:52 PM

Problems

C H A P T ER 2 0

Buzz Newsstand Income Statement For the Year Ended December 31, 20-Revenue: Sales Less: Sales Ret. and Allow. Net Sales Cost of Merch. Sold: Merch. Inv., Jan 1, 20-Purchases Plus: Transportation In Cost of Del. Merch. Less: Purch. Discounts Purch. Ret. and Allow. Net Purchases Cost of Merch. Avail. Merch. Inv., Dec. 31, 20-Cost of Merch. Sold Gross Profit on Sales Operating Expenses: Advertising Expense Insurance Expense Miscellaneous Expense Salaries Expense Supplies Expense Utilities Expense Total Oper. Expenses Operating Income Less: Fed. Inc. Tax Exp. Net Income

Analyze

608

299 1 5 6 00 9 5 0 0 00 289 6 5 6 00 64 8 0 0 00 168 6 2 4 00 8 2 3 6 00 176 8 6 0 00 2 9 5 0 00 2 1 0 8 00

5 0 5 8 00 171 8 0 2 00 236 6 0 2 00 60 4 0 0 00 176 2 0 2 00 113 4 5 4 00 4 1 1 26 2 4

000 800 600 900 744 200

00 00 00 00 00 00 41 72 14 57

244 210 913 297

00 00 00 00

Determine the impact of adjusting entries on net income.

Chapter 20 Problems

586-611_CH20_868829.indd 608

9/15/05 12:10:55 PM

Winning Competitive Events

CHAPTER 20

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Closing entries for a corporation are made from information in a work sheet’s a. Trial Balance columns. b. Adjustments columns. c. Income Statement columns. d. Balance Sheet columns. e. none of these answers 2. The procedure for transferring information from a journal to ledger accounts is called a. journalizing. b. adjusting. c. file maintenance. d. posting. e. none of these answers 3. Proving the accuracy of the adjusting and closing entries is best defined as a. preparing a post-closing trial balance. b. preparing the statements. c. closing the temporary accounts. d. adjusting the ledger accounts. e. none of these answers 4. To close the Income Summary account of a corporation with a net loss, the balance is closed into the a. Retained Earnings account with a debit. b. Retained Earnings account with a credit. c. account which caused the net loss with a debit. d. none of the above

Business Professionals of America MULTIPLE CHOICE 5. Which of the following accounts is closed at the end of a fiscal period? a. Membership Fees Income Need More Help? b. Accounts Receivable Go to glencoeaccounting.glencoe.com and c. Delivery Equipment click on Student Center. Click on Winning d. Retained Earnings Competitive Events and select Chapter 20. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

586-611_CH20_868829.indd 609

Chapter 20 Winning Competitive Events

609

10/13/05 10:37:26 PM

C H A P T ER 2 0 Critical Thinking

Completing the Accounting Cycle

CASE

STUDY

Merchandising Business: Department Store

ETHICS

Handling Sales Returns

a mattoefr

))

$ )) Communicating ACCOUNTING

610

Real-World Applications and Connections

1. What is the source of information for journalizing the closing entries? 2. How are temporary accounts with credit balances closed? 3. Describe the journal entry to record a net loss. 4. Analyze the closing of the Income Summary and Retained Earnings accounts when the business has net income and when it has a net loss. 5. Create a memory device to help you remember all the closing entries for a corporation. 6. Justify the use of only three closing entries for a corporation although a sole proprietorship uses four. You work in the accounting department for Pearl’s, a trendy department store. The accounting manager asked you to review the work of an accounting intern who completed the closing process. Some temporary accounts in the post-closing trial balance still have balances. INSTRUCTIONS 1. Explain how to tell which accounts should have zero balances after closing. 2. Explain how to determine which accounts have and have not been closed. 3. Suggest ways to explain to the intern why temporary accounts have zero balances after closing. 4. List human-relations skills you might use in your explanation to the intern. Most retail stores give employees specific instructions on how to process a sales return. For example, a cash refund can only be given if cash was paid. Imagine that you work for a large sporting goods store like The Sports Authority. Your friend, Martin, comes in to return a sweatshirt he purchased recently. You know he purchased the sweatshirt on sale, but he wants you to give him a full refund. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Explaining Results As you are completing the closing entries for the fourth quarter, you realize that your company, Dynamic Sound, has a net loss. You know that management is not aware that the fourth quarter financial statements are so bleak. Select a partner from your class and role-play an explanation of how the Income Summary and Retained Earnings accounts are affected by the loss. In your explanation, model customer service principles of accuracy, thoroughness, and respect.

Chapter 20 Real-World Applications and Connections

586-611_CH20_868829.indd 610

9/15/05 12:11:06 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 20

Maintaining and Troubleshooting Technologies In the accounting department of KidsWear Inc., you process the closing entries. This morning the printer will not print the ledgers or journals. INSTRUCTIONS List the steps you need to take to troubleshoot this problem. For each step indicate whom to call if the problem is not resolved.

Number Conventions Many countries use decimal points instead of commas to separate thousands and use a comma instead of a decimal point as a decimal marker. For example the number 45,255.08 becomes 45.255,08. INSTRUCTIONS Convert these numbers: (1) 121,309,411.98 (2) 74,520.229

Your Stocks Your future savings may include stock. Your stock investment becomes an asset for you and part of stockholders’ equity for the company. PERSONAL FINANCE ACTIVITY Choose a company to investigate as an investment. List how you could find the stock’s current price. PERSONAL FINANCE ONLINE Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 20.

Calculating Return on Stockholders’ Equity One measure of a corporation’s profitability is the return on stockholders’ equity. It shows how much the business earned for each dollar invested by stockholders. Net Income Average Stockholders’ Equity

$20,990  0.1045 or 10.45% $200,832

Average stockholders’ equity  (beginning stockholders’ equity
ending stockholders’ equity)  2. INSTRUCTIONS Use PETsMART’s financial statements in Appendix F to complete the following. 1. Calculate the return on stockholders’ equity for the year ending February 1, 2004. 2. Explain why you think this calculation Closing the Books is important to potential buyers of a How do business activities affect company’s stock. net income or net loss? Visit glencoeaccounting .glencoe.com and click on Student Center. Click on WebQuest and select Unit 4 to continue your Internet project.

glencoeaccounting.glencoe.com

586-611_CH20_868829.indd 611

Chapter 20 Real-World Applications and Connections

611

9/15/05 12:11:14 PM

CH A P T ER 2 1

Accounting for Publicly Held Corporations BEFORE YOU

READ

What You’ll Learn

Predict

1.

Describe the characteristics of the corporate form of business organization.

2.

Prepare journal entries to record the issue of stock to investors.

1. 2. 3. 4.

3.

Prepare journal entries to record the distribution of earnings to owners.

4.

Prepare financial statements for publicly held corporations.

5.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

Many individuals and institutions buy the stock of publicly held corporations.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING CORPORATE STOCK

Hewlett-Packard What do vitamins and network systems have in common? When Vitamin Shoppe, a high-quality vitamin retailer, decided to open 100 new stores in one month, Hewlett-Packard (HP) went to work. It designed and implemented standardized processes and equipment to connect all the new stores quickly. With HP’s support, Vitamin Shoppe opened all its new stores on target. You might think of your printer or computer when you hear Hewlett-Packard’s name, but its information technology services department is one of the world’s largest. Other satisfied clients include 7-11, Frontier Airlines, and Brandywine School District. Investors like to hear success stories like these. They also like to see positive financial results, such as dividend payments to stockholders.

What Do You Think? If you were considering purchasing stock in HewlettPackard or IBM, what factors would you investigate?

612

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 612

4/17/06 7:09:13 AM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Many people, both inside and outside the organization, review a corporation’s financial reports. Some analyze the reports to decide whether to buy or sell stock in the company. Others evaluate the reports to decide whether to loan money to the company. Still others study the reports to plan for the future including staffing, purchasing, and budget plans. Because so many people make decisions based on financial reports, they must be prepared accurately.

Personal Connection 1. If your employer’s financial statements are available, did it earn a profit last year? 2. If your employer’s statements are not available, locate a public company’s annual report on the Internet or in your library. Did it earn a profit or record a loss last year?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 21.

glencoeaccounting.glencoe.com

612-637_CH21_868829.indd 613

613

4/17/06 7:09:18 AM

SECTION 1

BEFORE YOU

READ

Main Idea

Publicly Held Corporations The United States has more sole proprietorships and partnerships than corporations. Corporations, however, account for more business activity than the other two forms of business combined. Many high profile companies like The Coca-Cola Company and General Motors are organized as corporations.

Investors from the general public purchase stock of publicly held corporations.

Characteristics of a Corporation

Read to Learn…

How Is a Corporation Different from Other Forms of Business Organization?

➤ the unique features of a

corporation. (p. 614) ➤ how to account for the issue of stock. (p. 615)

Key Terms closely held corporation publicly held corporation board of directors authorized capital stock par value common stock proxy preferred stock Paid-in Capital in Excess of Par

In Chapters 14 to 20 you learned to record business transactions for corporations. A closely held corporation is a corporation owned by a few persons or by a family. The stock of a closely held corporation is not sold to the general public. In this chapter you will learn about transactions that apply specifically to publicly held corporations. A publicly held corporation is one whose stock is widely held, has a large market, and is usually traded on a stock exchange such as the New York Stock Exchange. In previous chapters On Your Mark could have been either a closely held or publicly held corporation. In this chapter On Your Mark will illustrate transactions for a publicly held corporation. The corporation has several unique features: •

•

AS YOU

READ

Key Point Publicly Held and Closely Held Corporations A closely held corporation’s stock is not sold to the public.

614

•

Legal Permission to Operate—To operate a business as a corporation, its incorporators (organizers) file an application with state officials for permission to operate. When the application has been approved, it becomes the corporation’s charter. The charter indicates the purpose of the business and spells out the rules under which the business is to operate. The charter also states the type and amount of stock a corporation is authorized to issue. Separate Legal Entity—A corporation is a separate legal entity that is created and exists only by law. A corporation may enter into contracts, borrow money, and conduct business in the same manner as a person. It may acquire, own, and sell property in its name. It can also sue and be sued in the courts. Stockholders—The ownership of a corporation is divided into units called shares of stock. The owners of a corporation are called stockholders. Each stockholder receives a stock certificate as proof of ownership. The stock certificate lists the name of the stockholder, the number of shares issued, and the date the shares were issued.

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 614

4/17/06 7:09:28 AM

•

Professional Management—Stockholders own the corporation, but they do not manage it. The stockholders elect a board of directors , who govern and are responsible for the affairs of the corporation.

Capital Stock How Do You Measure Ownership of a Corporation?

AS YOU

READ

In Your Own Words Capital Stock In your own words, explain the meaning of capital stock.

Stockholders’ equity is the value of the stockholders’ claims to the corporation’s assets. As you learned in Chapter 19, corporations report stockholders’ equity in two parts: • •

the equity paid into the corporation by stockholders the equity earned by the corporation and retained in the business

The maximum number of shares a corporation may issue is called its authorized capital stock . The authorized number of shares is usually much higher than the number of shares the corporation plans to sell right away. This allows the corporation to sell additional shares at a later time. State laws may require that an amount or value be assigned to each share of stock before the corporation sells it to the public. The amount assigned to each share is referred to as par value , the per-share dollar amount printed on the stock certificates. The par value is used to determine the amount credited to the capital stock account. Par values of $1, $5, and $25 are common. The corporate charter specifies the types of capital stock that a corporation may issue. The two main types of stock are common and preferred.

AS YOU

READ

It’s Not What It Seems Par Value Par value is a fixed amount and is almost never the current value of a share of stock. A stock’s current selling price on the stock market is called market value.

Common Stock If the corporation issues only one class of capital stock, it is called common stock . The owners of common stock participate in the corporation as follows: •

• •

Elect the board of directors and, through it, exercise control over the operations of the corporation. Stockholders are entitled to one vote for each share of stock they own. The election occurs at the stockholders’ meeting, which is usually held once a year. If a stockholder cannot attend the meeting, he or she may send in a proxy , which gives the stockholder’s voting rights to someone else. Share in the earnings of the corporation by receiving dividends declared by the board of directors. Are entitled to share in the assets of the corporation if it goes out of business.

Preferred Stock To appeal to as many investors as possible, a corporation may also issue preferred stock. Preferred stock has certain privileges (or preferences) over common stock. Preferred stockholders participate as follows: •

Are entitled to receive dividends before common stockholders. The preferred stock dividend is stated in specific dollars, such as $6, or as a percentage of the stock’s par value, such as 6 percent. The stock itself is then referred to as “preferred $6 stock” or “preferred 6% stock.”

MATH HINTS Multiply by Tens To multiply by a power of 10, move the decimal point to the right the same number of places as there are zeros in the power of 10. $6.00  100  $600.00 Two zeros The decimal point moved two places $7.50  1,000  $7,500.00 Three zeros The decimal point moved three places

Section 1 Publicly Held Corporations

612-637_CH21_868829.indd 615

615

4/17/06 7:09:30 AM

•

Are given preference over common stockholders to distributions of the corporate assets should the company go out of business.

In return for these special privileges, the preferred stockholders give up two rights: • •

to vote to participate in the control of the corporation.

Usually, investors buy preferred stock to receive the stated dividend.

Issuing Common Stock When a corporation issues common stock, the Common Stock account is credited for the par value of the stock. Let’s look at some examples. Issuing Common Stock at Par Value. When On Your Mark was incorporated, it had the following transaction.

B u s i n e s s Tr a n s a c t i o n On January 3 On Your Mark Athletic Wear issued 10,000 shares of $10 par common stock at $10 per share. On Your Mark received $100,000 for the shares, Memorandum 3. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4

20-Jan.

DESCRIPTION

POST. REF.

PAGE DEBIT

READ

Key Point Recording the Issuance of Common Stock When a corporation issues common stock, it credits • Common Stock for the par value of the stock. • Paid-in Capital in Excess of Par for any amount received in excess of par value.

616

CREDIT 1

3 Cash in Bank Common Stock Memorandum 3

100 0 0 0 00

2

100 0 0 0 00

3 4

5

AS YOU

46

5

Issuing Common Stock in Excess of Par Value. Investors are often willing to pay more than par value for the stock of a corporation. When a corporation sells its stock at a price that is above par, the excess over par is credited to a separate stockholders’ equity account called Paid-in Capital in Excess of Par . Paid-in Capital in Excess of Par appears in the chart of accounts immediately following the Common Stock account. The amounts recorded in this account are not profits to the corporation. Instead, they represent part of the stockholders’ investment in the corporation. This account follows the same rules of debit and credit as other stockholders’ equity accounts. Paid-in Capital in Excess of Par Debit  Decrease Side

Credit  Increase Side Normal Balance

One year after On Your Mark was incorporated, it had the following transaction.

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 616

4/17/06 7:09:32 AM

B u s i n e s s Tr a n s a c t i o n On January 5 On Your Mark issued 5,000 shares of $10 par common stock at $11.50 per share, Memorandum 147. On Your Mark received $57,500 for the shares. Before recording the transaction, determine how much of the $57,500 is credited to Common Stock and how much is credited to Paid-in Capital in Excess of Par.

Credit to Common Stock: 5,000 shares at $10 par value $ 50,000 Credit to Paid-in Capital in Excess of Par: 5,000 shares at $1.50 ($11.50 issue price ⴚ $10.00 par value) per share ⴙ 7,500 Total cash received $ 57,500 Remember, the amount credited to the Common Stock account is the par value of the shares issued. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2

20-Jan.

3 4 5

POST. REF.

DESCRIPTION

PAGE DEBIT

99

CREDIT 1

5 Cash in Bank Common Stock Paid-in Cap. in Ex. of Par Memorandum 147

57 5 0 0 00

2

50 0 0 0 00 7 5 0 0 00

3 4 5

6

6

Issuing Preferred Stock When preferred stock is issued, a corporation credits the Preferred Stock account for the stock’s par value. Preferred stock is almost always issued at its par value. On Your Mark was incorporated on January 3. It was authorized to issue 1,000 shares of preferred stock with a par value of $100 and a stated dividend of $6. The next day the company had the following transaction.

B u s i n e s s Tr a n s a c t i o n On January 4 On Your Mark issued 250 shares of preferred $6 stock, $100 par, at $100 per share. On Your Mark received $25,000 for the shares, Memorandum 5. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4

20-Jan.

DESCRIPTION

POST. REF.

PAGE DEBIT

47

CREDIT 1

4 Cash in Bank Preferred Stock Memorandum 5

25 0 0 0 00

2

25 0 0 0 00

4

5

5

Section 1 Publicly Held Corporations

612-637_CH21_868829.indd 617

3

617

4/17/06 7:09:33 AM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to compare common stock and preferred stock. Add answer rows as needed.

#HARACTERISTIC

#OMMON3TOCK

0REFERRED3TOCK

Do the Math A corporation sells 3,000 shares of $25 par common stock and receives $97,500. How much did each share sell for? What was the per share amount of paid-in capital in excess of par?

Problem 21–1 Examining Capital Stock Transactions Dublin Corporation was organized and authorized to issue 10,000 shares of $100 par, preferred 8% stock and 500,000 shares of $10 par common stock. The three transactions recorded in the following T accounts took place during the first month of operations.

Instructions In your working papers, describe each of the three transactions. Cash in Bank Debit  (1) 300,000 (2) 200,000 (3) 700,000

Credit 

Common Stock Debit 

618

Credit  (1) 300,000 (3) 500,000

Preferred Stock Debit 

Credit  (2) 200,000

Paid-in Capital in Excess of Par Debit 

Credit  (3) 200,000

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 618

4/17/06 7:09:36 AM

SECTION 2

Distribution of Corporate Earnings

In Section 1 you learned to record stock issue transactions for a corporation. In this section you will learn how corporations distribute earnings to the stockholders. Corporations like General Motors have a long history of distributing a portion of earnings to their stockholders every year, making their stock an attractive investment.

Dividend Accounts What Are Corporate Dividends? When an owner of a sole proprietorship or a partnership wishes to take money out of the business, a check is written on the checking account of the business. The amount of the check is recorded as a debit in the owner’s withdrawals account, which reduces the owner’s equity. The owners (stockholders) of a publicly held corporation cannot withdraw cash whenever they want. Instead, they receive dividends. A dividend is a distribution of cash to stockholders. Dividends reduce retained earnings. The corporation’s board of directors declares, or authorizes, dividends. Before a dividend is declared, the corporation should have a sufficient amount of cash available to pay the dividend. In addition, since dividends decrease retained earnings, there must be an adequate balance in the Retained Earnings account. Figure 21–1 on page 620 illustrates the important dates in the dividend process. A separate account named Dividends Dividends is used to record dividends declared. Credit Debit The Dividends account is a contra  stockholders’ equity account. At the end Decrease Side Increase Side of the accounting period, the Dividends Normal Balance account is closed to the Retained Earnings account. The rules of debit and credit for Dividends are shown in this T account. Notice that they are the opposite of the rules for the stockholders’ equity accounts. Dividend amounts could be debited directly to the Retained Earnings account. Most corporations, however, prefer to use a separate account so that the dividend amounts can be easily determined. A liability account, Dividends Payable, is used to record the amount of dividends that will be paid on the payment date. Like all liability accounts, Dividends Payable is increased by credits and decreased by debits. The normal balance of the Dividends Payable account is a credit balance.

BEFORE YOU

READ

Main Idea A corporation distributes a portion of its earnings to stockholders in the form of dividends.

Read to Learn… ➤ how to account for

dividends. (p. 619) ➤ how to record dividend

transactions. (p. 620)

Key Terms dividend

Section 2 Distribution of Corporate Earnings

612-637_CH21_868829.indd 619

619

4/17/06 7:09:38 AM

THREE IMPORTANT DATES IN THE DIVIDEND PROCESS Date of Declaration

Date of Record

Date of Payment

The date on which the board of directors declares or authorizes a dividend. When a cash dividend is declared, a liability is created for the amount of the total cash dividend to be paid.

Persons who own the stock on this date, called stockholders of record, are entitled to the dividend. The date of record is usually one or two weeks after the date of declaration.

The date on which the dividend is paid.

Record Journal Entry

No Journal Entry is recorded

Record Journal Entry

Figure 21–1 Important Dates in the Dividend Process

Dividend Transactions How Do You Journalize Dividend Transactions? A corporation authorized to issue two types of stock uses separate dividend and dividend payable accounts for each type. On Your Mark uses these: Dividends—Preferred Dividends—Common

Dividends Payable—Preferred Dividends Payable—Common

Let’s look at the transactions involved when dividends are declared by the board of directors of On Your Mark during its second year of incorporation.

Dividends on Preferred Stock As mentioned, preferred stockholders have certain preferences over common stockholders; one is the right to receive dividends before common stockholders. The preferred stock dividend amount is predetermined, or stated. The stated dividend indicates the amount to be paid to preferred stockholders per year. On Your Mark issued 250 shares of preferred $6 stock; that is, it will pay a $6 dividend for each share of preferred stock annually or in semiannual or quarterly installments:

Annually Semiannually Quarterly

$6.00 $3.00 ($6.00 ⴜ 2) $1.50 ($6.00 ⴜ 4)

Date of Declaration. A journal entry records the dividend on preferred stock on the date of declaration, the date the board declares it. 620

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 620

4/17/06 7:09:40 AM

B u s i n e s s Tr a n s a c t i o n On November 15 On Your Mark’s board of directors declared an annual cash dividend on the 250 shares of preferred $6 stock issued. It is payable to preferred stockholders of record on November 29 and will be paid on December 15. The total preferred dividends amount is $1,500 (250 shares  $6), Memorandum 215. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

POST. REF.

20-Nov. 15 Dividends—Preferred Dividends Payable—Preferred Memorandum 215

PAGE DEBIT

72

CREDIT 1

1 5 0 0 00

2

1 5 0 0 00

3 4

Date of Record. On November 29 the corporation checks its records and prepares a list of preferred stockholders entitled to receive the dividend. No journal entry is required on this date. Date of Payment. On December 15 a check for $1,500, the total dividend payable on preferred stock, is written and deposited in a special dividends checking account. Separate checks written on this account are made payable to each preferred stockholder entitled to receive the dividend.

B u s i n e s s Tr a n s a c t i o n On December 15 On Your Mark issued Check 1373 for $1,500 in payment of the dividend on preferred stock declared November 15. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

POST. REF.

20-Dec. 15 Dividends Payable—Preferred Cash in Bank Check 1373

PAGE DEBIT

81

CREDIT 1

1 5 0 0 00

2

1 5 0 0 00

3 4

Dividends on Common Stock Dividends on common stock may be declared in one of two ways. 1. The board of directors may declare a dividend amount per common share. On Your Mark’s board declared a 50¢ per common share dividend. It will pay a 50¢ dividend for each share of common stock. 2. The board may decide to declare the total cash dividend for both preferred and common stock. In this case the company first pays the preferred dividends and then divides the remainder equally among the common stockholders. For example, On Your Mark’s board of directors declared a $3,000 total cash dividend. Preferred stockholders will receive $1,500 (250 shares  $6). It splits the remainder, $1,500 ($3,000  $1,500), among the common stockholders. Each share of common stock receives a 10¢ dividend ($1,500  15,000 shares). Dividends on common stock, like preferred stock, can be paid annually, semiannually, or quarterly. Most publicly held corporations pay quarterly. Section 2 Distribution of Corporate Earnings

612-637_CH21_868829.indd 621

621

4/17/06 7:09:41 AM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a diagram like this one to describe which accounts (if any) are debited and credited for each event.

%VENT

!CCOUNT$EBITED

!CCOUNT#REDITED

$IVIDENDONCOMMONSTOCKˆ DATEOFDECLARATION

$IVIDENDONCOMMONSTOCKˆ DATEOFRECORD

$IVIDENDONCOMMONSTOCKˆ DATEOFPAYMENT

Do the Math On January 28 the board of directors for Jelly Bean Works declared an annual cash dividend on 200 shares of preferred $10 stock. What is the total amount of the dividend? How is this dividend accounted for in the company’s books?

Problem 21–2 Distributing Corporate Earnings During its first year of operation, Longhorn Corporation issued 17,500 shares of $10 par common stock. At the end of the year, the corporation had a net income of $350,000. The board of directors declared a cash dividend of $5 per share.

Instructions Answer these questions in your working papers. 1.) How much of the net income did Longhorn distribute to the stockholders? 2.) How much of the net income did the corporation retain?

Problem 21–3 Analyzing a Source Document This memorandum contains data about the first quarter dividend on the common stock of Rob Williams Thrift Market Inc.

Instructions Prepare the journal entries to record the following in your working papers. Use general journal page 18. • •

622

declaration of the dividend payment of the dividend, Check 221

Rob Williams Thrift Market Inc. 2347 Eastern Parkway Orange, IA 50322-6922

      

  

! " !!"  "# * !    0  # 1, % 

      ! "# "  $  # %    &'() ## ! "** #"+ ##, -   ! " #  &   ! .* #  / -

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 622

4/17/06 7:09:41 AM

Accounting Careers in Focus CONTROLLER National Association of Black Accountants, Inc. (NABA), Greenbelt, Maryland Reginald Nance Q: What does NABA do? A: We work to expand the influence of minority professionals in the fields of accounting and finance.

Q: What are your day-to-day responsibilities? A: I manage the overall finances of the organization. I make sure cash flow is where it should be and the financials are in order. Basically, I ensure that all revenue and expenses are accounted for properly. If it has to do with finance, it goes through me.

Q: What do you like most about your job? A: I like that my job allows me to see the basis of the business.

.. Tips from . little idea You may have expect when what salary to your first job presented with t ine fair marke offer. Determ by conducting compensation e Internet, read research on th d an ublications, ing industry p fing firms like contacting staf r ternational fo Robert Half In s. n io publicat annual salary

If you know how an organization is doing financially, you can determine where it is going. From a nonprofit standpoint, I enjoy the peace of mind of knowing that I’m working for something greater than just the bottom line—I’m helping the community at large.

Q: What is most challenging about your job? A: The most challenging aspect is managing deadlines. An efficient timemanagement system is necessary to keep on top of things.

Q: What advice do you have for accounting students interested in becoming controllers? A: Sit for the CPA exam as soon as possible. It is looked upon as a high achievement in the industry and will allow you to advance your career quickly. Also, identify a mentor; I’ve been fortunate to find several mentors in my career. And develop your written and oral communication skills as much as possible.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Coordinate and prepare financial statements; design and implement internal control policies and procedures; hire, train, and retain accounting staff. Training or Education Needed: A bachelor’s degree in accounting or finance; a master’s degree in business administration; CPA or CMA designation is preferred; at least seven years of experience. Aptitudes, Abilities and Skills: Solid communication skills, technology skills, organizational skills, and management skills. Salary Range: $60,000 to $150,000 depending on location, level of responsibility and company revenues. Career Path: Gain public accounting experience, and then accept a position in a corporate environment, such as accounting manager, director of accounting, or assistant controller.

Thinking Critically

What kind of advice would you ask of a mentor? Chapter 21 Accounting Careers in Focus

612-637_CH21_868829.indd 623

623

4/17/06 7:09:43 AM

SECTION 3

BEFORE YOU

Financial Reporting for a Publicly Held Corporation Many corporations prepare a statement of stockholders’ equity instead of a statement of retained earnings. This section examines the information reported on the statement of stockholders’ equity, how this statement is prepared, and how stockholders’ equity is reported on a corporation’s balance sheet.

READ

Main Idea Corporate financial statements report stock issues and dividends.

The Income Statement

Read to Learn…

Does a Publicly Held Corporation’s Income Statement Differ from That of a Closely Held Corporation?

➤ about a corporate income

The income statement of a publicly held corporation is similar to that prepared by a closely held corporation. Remember, the federal corporate income taxes paid by a corporation are reported separately on the income statement.

statement. (p. 624) ➤ how and why corporations prepare a statement of stockholders’ equity (p. 624) ➤ about a corporate balance sheet. (p. 625) ➤ about a corporate statement of cash flows. (p. 626)

The Statement of Stockholders’ Equity What Is a Statement of Stockholders’ Equity? In Chapter 19 you learned how to prepare a statement of retained earnings for a closely held corporation. That statement reports the changes in the Retained Earnings account during the period. It showed:

Retained Earnings, beginning balance  Net Income Retained Earnings, ending balance

Key Terms statement of stockholders’ equity

An increasing number of corporations prepare a statement of stockholders’ equity rather than a statement of retained earnings. In contrast to the statement of retained earnings, the statement of stockholders’ equity reports the changes in all stockholders’ equity accounts during the period. It also provides information about the transactions affecting stockholders’ equity during the period. The information reported on a statement of stockholders’ equity includes • • • •

the number of shares of each type of stock issued, the total amount received for those shares, the net income or net loss for the period, and dividends declared during the period.

Figure 21–2 shows the statement of stockholders’ equity for On Your Mark at the end of its second year of incorporation. The information needed to prepare the statement comes from the work sheet and from the general ledger accounts. The statement is prepared as follows:

624

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 624

4/17/06 7:09:49 AM

On Your Mark Athletic Wear Statement of Stockholders’ Equity For the Year Ended December 31, 20-$100 Par Preferred $6 Stock 1 2 3 4 5 6 7

Balance, January 1, 20-Issuance of 5,000 shares of common stock Net Income Cash Dividends: Preferred Stock Common Stock Balance, December 31, 20--

$10 Par Common Stock

25 0 0 0 00 100 0 0 0 00 50 0 0 0 00

Paid-in Capital in Excess of Par 7 5 0 0 00

Retained Earnings

Totals

27 6 0 0 00 152 6 0 0 00 57 5 0 0 00 13 5 2 5 00 13 5 2 5 00

• •

•

2 3 4

25 0 0 0 00 150 0 0 0 00

7 5 0 0 00

(1 5 0 0 00) (1 5 0 0 00) (7 5 0 0 00) (7 5 0 0 00) 32 1 2 5 00 214 6 2 5 00

8

•

1

5 6 7 8

The names of the four stockholders’ equity accounts appear at the top of the amount columns. There is also a Totals column at the far right. The first line shows the balance of each account at the beginning of the period. The next lines describe various transactions affecting the stockholders’ equity accounts, such as issuance of stock, net income, and dividends declared. The transactions are described in the left column. The increase or decrease amounts are recorded in the individual account columns and in the Totals column. For example, the second line on the statement indicates that the company issued 5,000 shares of common stock during the period. The issuance of the 5,000 shares increased the balance of the Common Stock account by $50,000. Since the shares were issued at a price above par value, the Paid-in Capital in Excess of Par account increased by $7,500. The final line shows the balance of each account at period-end.

Figure 21–2 Statement of Stockholders’ Equity

As you review Figure 21–2, notice that the amounts that decrease account balances, like dividends declared, are enclosed in parentheses. The cash dividends declared are listed separately for preferred and common stock. Also notice that the Retained Earnings column of the statement of stockholders’ equity contains the same information that is reported on a statement of retained earnings. Remember that net income increases retained earnings, and dividends declared decrease retained earnings. The statement of stockholders’ equity is used to prepare the corporation’s balance sheet.

The Balance Sheet How Do You Prepare the Stockholders’ Equity Section of the Balance Sheet? The assets and liabilities sections of a balance sheet for a publicly held corporation are similar to those of a balance sheet for a closely held corporation. Notice in Figure 21–3 on page 626 that the Dividends Payable accounts are reported in the liabilities section. Since On Your Mark paid the Section 3 Financial Reporting for a Publicly Held Corporation

612-637_CH21_868829.indd 625

625

4/17/06 7:09:56 AM

dividends before the end of the year, it reports zero balances in these liability accounts. The stockholders’ equity section of a publicly 14 5 6 2 10 held corporation’s balance sheet is more detailed than that of a closely held corporation. As you can see 27 0 1 6 00 in Figure 21– 4, each type of stock issued by On Your Mark is listed separately under the heading “Paid-in Capital.” Preferred stock is listed before common stock. Each listing describes the following:

On Your Mark Athletic Wear Balance Sheet December 31, 20--

Liabilities Accounts Payable Dividends Payable—Preferred Dividends Payable—Common Total Liabilities

Figure 21–3 Reporting the Balances of the Dividends Payable Accounts on the Balance Sheet

• • •

the par value, the number of shares authorized, and the number of shares issued.

The Dividends accounts are not listed in the stockholders’ equity section because they are closed to Retained Earnings at the end of the year. Thus, the retained earnings amount shown on the balance sheet has been reduced by the dividends declared during the period.

The Statement of Cash Flows Where Are Stock Issues and Dividends Reported on This Statement? The Financing Activities section of the statement of cash flows reflects activities related to ownership of the corporation. A stock issue results in a cash inflow from a financing activity. Payment of dividends is a cash outflow. On Your Mark Athletic Wear Balance Sheet December 31, 20--

Stockholders’ Equity Paid-in Capital: $6 Preferred Stock, $100 par, 1,000 shares authorized, 250 shares issued Common stock, $10 par, 20,000 shares authorized, 15,000 shares issued Paid-in Capital in Excess of Par Total Paid-in Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

25 0 0 0 00 150 0 0 0 00 7 5 0 0 00 182 5 0 0 00 32 1 2 5 00 214 6 2 5 00 241 6 4 1 00

Figure 21–4 The Stockholders’ Equity Section of the Balance Sheet 626

Chapter 21 Accounting for Publicly Held Corporations

612-637_CH21_868829.indd 626

4/17/06 7:10:01 AM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to identify the financial statement on which each of the following appear: cash dividends, common stock, dividends payable, paidin capital in excess of par, preferred stock, retained earnings. Add answer rows as needed.

3TATEMENTOF3TOCKHOLDERS%QUITY

"ALANCE3HEET

Do the Math Ron Kanai, president of Sunny Days, a Hawaiian-based sun care products manufacturer and retailer, is looking for a buyer. He believes an analysis of stock prices and dividends will appeal to potential corporate buyers. As the company’s accounting manager, use spreadsheet, accounting, or graphics software to prepare the following information in a clustered column chart showing the stock price and dividends declared for the past two years. What does the chart say about Sunny Days’ financial condition that could attract potential buyers?

Q1 Stock Price Dividend Declared

13.50 2.50

Year 1 Q2 Q3 13.60 2.50

14.90 2.90

Q4

Q1

17.00 3.00

17.50 3.25

Year 2 Q2 Q3 20.00 3.50

23.00 4.90

Q4 25.50 4.95

Problem 21–4 Examining the Statement of Stockholders’ Equity The following transactions of Victor Jewelry Corporation took place during the period.

Instructions Use the form in your working papers to indicate which of the transactions is reported on the statement of stockholders’ equity. Transactions: 1. Paid accounts payable of $50,000. 2. Issued 2,000 shares of $10 par common stock, receiving $15 per share. 3. The board of directors declared a cash dividend of $12,000 for all common stockholders. 4. Bought equipment on account at a total cost of $125,000. 5. Paid the cash dividend declared in Transaction 3. 6. Issued 500 shares of $100 par, $7 preferred stock. 7. Paid the federal income tax installment of $5,000. 8. Earned a net income of $150,000 for the period. Section 3 Financial Reporting for a Publicly Held Corporation

612-637_CH21_868829.indd 627

627

4/17/06 7:10:03 AM

CH A P T ER 2 1

Summary

Key Concepts 1. The corporation has several unique characteristics: • • • •

legal permission from the state to operate recognized as a separate legal entity owned by stockholders operated by professional managers hired by a board of directors that is elected by stockholders

Two types of corporations are: • closely held, owned by a few persons or by a family • publicly held, whose stock is widely held, has a large market, and is usually traded on a stock exchange 2. Corporations may issue two types of stock, common and preferred. The T-account analysis of issuance of stock follows. a. Issuing preferred stock at par value: Cash in Bank Debit  xxx

Preferred Stock

Credit 

Debit 

Credit  xxx

b. Issuing common stock at par value: Cash in Bank Debit  xxx

Common Stock

Credit 

Debit 

Credit  xxx

c. Issuing common stock in excess of par (the issue of stock at a higher price than its par value): Cash in Bank Debit  xxx

Common Stock

Credit 

Debit 

Credit  xxx

Paid-in Capital in Excess of Par Debit  xxx

628

Credit  xxx

Chapter 21 Summary

612-637_CH21_868829.indd 628

4/17/06 7:10:05 AM

CHAPT E R 21

Summary

3. Corporations may distribute part of their earnings to stockholders in the form of dividends. These are the journal entries required. Event

Importance

Journal Entry Required

Dividend is declared

Corporation’s board of directors votes to distribute earnings to owners.

Debit Dividends Credit Dividends Payable

Dividend date of record

The corporation makes a list to show who owns stock on the date of record.

No journal entry is made.

Dividend is paid

The corporation writes the dividend checks to owners.

Debit Dividends Payable Credit Cash in Bank

End of the year

The corporation closes the Dividends account.

Debit Retained Earnings Credit Dividends

4. Publicly held corporations prepare the following financial reports: • • • •

income statement statement of stockholders’ equity the balance sheet the statement of cash flows

The statement of stockholders’ equity reports all changes in stockholders’ equity accounts during the period. It usually replaces the statement of retained earnings. The statement of stockholders’ equity includes information about • • • •

the number of shares of each type of stock issued, the total amount received for those shares, net income (or loss) for the period, and the dividends declared during the period.

Refer to Figure 21–2 on page 625 to review the statement of stockholders’ equity.

Key Terms authorized capital stock

(p. 615)

par value

(p. 615)

board of directors

(p. 615)

preferred stock

(p. 615)

closely held corporation

(p. 614)

proxy

(p. 615)

common stock

(p. 615)

publicly held corporation

(p. 614)

dividend

(p. 619)

statement of stockholders’ equity

(p. 624)

Paid-in Capital in Excess of Par

(p. 616)

Chapter 21 Summary

612-637_CH21_868829.indd 629

629

4/17/06 7:10:07 AM

C H A P T ER 2 1 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

Corporation Characteristics a. Name three characteristics of a corporation. b. Explain the difference between a closely held corporation and a publicly held corporation. Record Stock Issue a. When stock is sold at a price above its par value, what amount is credited to the capital stock account? b. What is the classification of the Paid-in Capital in Excess of Par account? What is its normal balance? Record Earnings Distribution a. When a dividend is declared, which accounts are debited and which accounts are credited? b. Name and explain the three dates important to the dividend process. Corporate Financial Statements a. What type of information is reported on the statement of stockholders’ equity? b. Explain the difference between the statement of retained earnings and the statement of stockholders’ equity.

Apply Key Terms For each key term, give or find an example of the term in a newspaper, periodical, annual report, or on an Internet site. Then use the example in a sentence. authorized capital stock board of directors closely held corporation common stock dividend Paid-in Capital in Excess of Par

630

par value preferred stock proxy publicly held corporation statement of stockholders’ equity

Chapter 21 Review and Activities

612-637_CH21_868829.indd 630

4/17/06 7:10:09 AM

Computerized Accounting

CHAPT E R 21

Customizing Financial Statements Making the Transition from a Manual to a Computerized System Task Customizing financial statements

Manual Methods

Computerized Methods

• Using accounting stationery, you may reorganize information or add details to financial statements.

• Accounting software gives you the option to select and sort data that appears on each financial statement. • You may also customize information on a report.

Q&A Peachtree Question

Answer

How do I change the appearance or content of financial reports in Peachtree?

1. 2. 3. 4. 5.

From the Reports menu, select Financial Stmts. Select the report you wish to customize from the list. Display it on the screen. Select the Design icon above the report. You can adjust the size of the columns, the types of information displayed in the report, the font style and size, and the report layout. 6. If you wish to save the report in the new format, rename the file, leaving the original files in their original form.

How do I filter information on preformatted reports?

1. After you have selected a report from the list, click Preview to display it on your screen. 2. At the Filter option, you may accept the current settings or make changes to the displayed fields. The information that can be filtered varies according to the report.

QuickBooks Q & A QuickBooks Question

Answer

How do I change the appearance or content of financial reports in QuickBooks?

1. From the Reports menu, select Company & Financial. 2. Select the report you wish to customize. 3. Click the Modify Report button. You can adjust the size of columns, the types of information displayed in the report, the font style and size, and the report layout. 4. If you wish to save the report in the new format, click the Memorize button and give the report a new name.

How do I filter information on preformatted reports?

1. After you have selected a report, click the Modify Report button. 2. In the Filters tab, choose the item you wish to filter and enter the filter criteria. The information that can be filtered varies according to the report. 3. Click OK.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 21 Computerized Accounting

612-637_CH21_868829.indd 631

631

4/17/06 7:10:13 AM

C H A P T ER 2 1 Complete problems using:

Problems Manual Glencoe Peachtree Complete QuickBooks Spreadsheet OR OR OR Accounting Software Templates Working Papers Templates

Problem 21–5 Distributing Corporate Earnings SMART GUIDE Step–by–Step Instructions: Problem 21–6 1. Select the problem set for InBeat CD Shop (Prob. 21–6). 2. Rename the company and set the system date. 3. Record all transactions using the General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Complete the Analyze activity. 6. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 21–6 1. Restore the Problem 21-6.QBB file. 2. Record all transactions using the Make General Journal Entries option. 3. Print a Journal report and proof your work. 4. Complete the Analyze activity. 5. Back up your work.

During the first year of operations, Sunset Surfwear issued 18,500 shares of $10 par common stock. At the end of the year, the corporation had net income of $380,000. The board of directors declared a $5 cash dividend per share of common stock.

Instructions Answer the following questions in your working papers: 1. How much of the net income earned for the year was paid to the common stockholders? 2. How much of the net income was retained by the corporation?

Analyze

Problem 21–6 Journalizing the Issue of Stock On June 1 InBeat CD Shop was incorporated and authorized to issue 1,000 shares of $100 par, preferred 9% stock, and 10,000 shares of $25 par common stock.

Instructions In your working papers, record the following transactions on general journal page 1. Date

June

Transactions

1 Issued 200 shares of preferred 9% stock at $100 per share, Memorandum 3. 2 Issued 3,000 shares of common stock at $25 per share, Memorandum 7. 6 Received $31 per share for 2,000 shares of common stock issued, Memorandum 10. 7 Issued 50 shares of preferred 9% stock at par, Memorandum 11.

Analyze

632

Compare the date of declaration and date of payment with the date of record. Explain what entry or action is required on each date.

Identify the stock issued at a price above par. Calculate the total amount of capital that InBeat CD Shop received in the first week of June.

Chapter 21 Problems

612-637_CH21_868829.indd 632

4/17/06 7:10:15 AM

Problems Problem 21–7 Journalizing Common and Preferred Stock Dividend Transactions Shutterbug Cameras issued 8,000 shares of $80 par, preferred 7% stock and 35,000 shares of $25 par common stock.

Instructions In your working papers: 1. Record the following transactions on general journal page 14. 2. Post the transactions to the general ledger accounts provided in your working papers. Net income was $296,490. Date

Transactions

Oct. 15 The board of directors declared an annual cash dividend on the preferred 7% stock, payable on December 1, Memorandum 407. Nov. 5 Declared an annual cash dividend of $1.25 on 35,000 shares of common stock, payable on December 17, Memorandum 415. Dec. 1 Paid the dividend declared on October 15, Check 1163. 17 Paid the dividend declared on November 5, Check 1201.

Analyze

Calculate the amount of dividends payable on common stock and dividends payable on preferred stock at the end of December.

Problem 21–8 Preparing Corporate Financial Statements River’s Edge Canoe & Kayak is authorized to issue 10,000 shares of $100 par, preferred 9% stock and 500,000 shares of $5 par common stock. The following balances appeared in the Balance Sheet section of the company’s work sheet for the year ended December 31.

Instructions 1. Prepare the statement of stockholders’ equity. a. During the period the corporation issued 500 shares of 9% preferred stock at par and 25,000 shares of common stock at $9. b. The net income for the year was $425,000. 2. Prepare the balance sheet. 101 115 120 130 135 140 145 150 201 202

Cash in Bank Accounts Receivable Notes Receivable Merchandise Inventory Prepaid Ins. Supplies Delivery Truck Store Equipment Accounts Payable Dividends Payable—Preferred

$506,010 850,680 400,000 388,815 3,600 10,500 139,298 363,009 62,412 22,500

CHAPT E R 21 SMART GUIDE Step–by–Step Instructions: Problem 21–7 1. Select the problem set for Shutterbug Cameras (Prob. 21–7). 2. Rename the company and set the system date. 3. Record all transactions using the General Journal Entry option. Enter each transaction in the proper accounting period (month). 4. Print a General Journal report for the entire quarter and proof your work. 5. Print a General Ledger report. 6. Complete the Analyze activity. 7. End the session.

TIP: Set the date filter options to print a General Journal report that includes all of the entries for the quarter.

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 21–8 1. Select the spreadsheet template for Problem 21–8. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

CONTINUE Chapter 21 Problems

612-637_CH21_868829.indd 633

633

4/17/06 7:10:16 AM

C H A P T ER 2 1

Problems 203 210 215 301 303 304 305 307 308

SMART GUIDE

Dividends Payable—Common Fed. Corp. Income Tax Payable Sales Tax Payable Preferred Stock Common Stock Paid-in Capital in Excess of Par Retained Earnings Dividends—Common Dividends—Preferred

Analyze

Identify the total stockholders’ equity on December 31.

Step–by–Step Instructions: Problem 21–9 1. Select the problem set for Buzz Newsstand (Prob. 21–9). 2. Rename the company and set the system date. 3. Record all transactions. Enter each transaction in the proper accounting period (month). 4. Print a General Journal report and proof your work. 5. Print a Balance Sheet. 6. Complete the Analyze activity. 7. End the session.

SOURCE DOCUMENT PROBLEM Problem 21–9 Use the source documents in your working papers to complete this problem.

QuickBooks

CHALLENGE PROBLEM

1. Restore the Problem 21-9.QBB file. 2. Record all transactions. 3. Print a Journal report and proof your work. 4. Print a Balance Sheet. 5. Complete the Analyze activity. 6. Back up your work.

301 302 303 304 305 307 308

Preferred Stock Paid-in Capital in Excess of Par—Preferred Common Stock Paid-in Capital in Excess of Par—Common Retained Earnings Dividends—Preferred Dividends—Common

$150,000 11,250 225,000 112,500 366,800 0 0

Instructions In your working papers: 1. Record the following transactions on general journal page 42. Close the Dividends and Retained Earnings accounts. 2. Prepare the stockholders’ equity section of the balance sheet. Date

Transactions

Mar. 15

The board of directors approved a semiannual cash dividend of $62,250 for both preferred and common stockholders. The dividend is payable to stockholders of record as of April 15 with payment on May 1, Memorandum 635. Issued 500 shares of preferred stock at $108, Memorandum 651. Paid the dividends declared on March 15, Check 1256. The board of directors approved a semiannual cash dividend of $79,250 for both preferred and common stockholders. The dividend is payable to stockholders of record as of October 1 with payment on November 1, Memorandum 828. Paid the dividend declared on September 1, Check 2451.

Apr. 19 May 1 Sept. 1

Nov. 1

Analyze

634

Problem 21–9 Recording Stockholders’ Equity Transactions

Buzz Newsstand is authorized to issue 100,000 shares of $5 par common stock and 5,000 shares of $100 par, preferred 8% stock. On January 1, the beginning of the period, the stockholders’ equity accounts had the following balances:

PROBLEM GUIDE Step–by–Step Instructions: Problem 21–9

$150,000 20,000 4,500 500,000 750,000 300,000 735,000 262,500 45,000

Compare the December 31 Retained Earnings balance with the beginning balance of $366,800. Why did the balance change?

Chapter 21 Problems

612-637_CH21_868829.indd 634

4/17/06 7:10:17 AM

Winning Competitive Events

CHAPT E R 21

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Earnings distributed to stockholders are called a. retained earnings. b. revenue. c. capital gains. d. dividends. e. none of these answers 2. ________ stock is the type of stock issued by a corporation when only one class of stock is issued. a. Preferred b. Common c. Capital d. Dividend 3. When 10,000 shares of $10 par-value common stock are issued at $14 per share, Paid-In Capital in Excess of Par, Common Stock is credited for a. $140,000. b. $40,000. c. $100,000. d. none of the above 4. When a dividend is paid in cash, the accounts debited and credited are a. Dividends Received and Dividends Payable. b. Cash and Dividends Payable. c. Dividends Payable and Cash. d. Common Stock and Cash.

Business Professionals of America MULTIPLE CHOICE 5. A legal form that asks stockholders to transfer their voting rights is called a a. security. b. proxy. c. preemptive right. d. stock split. Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 21. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

612-637_CH21_868829.indd 635

Chapter 21 Winning Competitive Events

635

4/17/06 7:10:19 AM

C H A P T ER 2 1 Critical Thinking

CASE

a mattoefr

Publicly Held Corporations 1. What is a publicly held corporation? 2. Describe the components of stockholders’ equity. 3. Summarize the accounting entries when a corporation sells 200 shares of 9% preferred stock, with a par value of $100, for $125 per share. 4. Compare and contrast preferred and common stock. 5. Write a rule expressing when a dividend becomes a liability for a corporation. Explain the reason for the rule. 6. Justify the fact that corporations that sell their stock for an amount in excess of par cannot record the excess as profit.

Merchandising Business: Coffee Shop

STUDY

ETHICS

)) Communicating $ ))

ACCOUNTING

636

Real-World Applications and Connections

Cyber Café is a retail store that sells a variety of coffees, gourmet pastries, and other snacks. The store also offers computer stations where customers can surf the Web. Early success helped the owners of Cyber Café to incorporate and franchise the business. They now have franchises in 15 cities and want to raise additional money to open cafés in Japan. INSTRUCTIONS 1. List at least three ways the business could raise money for the new franchises. 2. If you were considering investing in Cyber Café, describe the ratios and analyses you would calculate from its financial statements. 3. Explain how these calculations would help you make an investment decision.

Using Insider Information You are an accountant for a large shipping company, like United Parcel Service (UPS). Through your work, you learn that your company is planning to buy a company that makes shipping containers. It’s a small company whose stock is traded on the stock exchange. You think about purchasing several thousand shares of this company’s stock, expecting to make a profit when your company purchases it. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Describing Corporations You work for a locally owned partnership that was just purchased by a corporation. You decide to share information about corporations with your coworkers. Create a one-page information sheet identifying the characteristics of a corporation. Write a paragraph explaining each characteristic.

Chapter 21 Real-World Applications and Connections

612-637_CH21_868829.indd 636

4/17/06 7:10:20 AM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Working in Teams Annabelle Bradly owns Aussie Diners in Australia and North America. The corporation is considering going public and offering common stock on the New York Stock Exchange. She calls you to invite the North American executive management team to meet before she makes the final decision to go public. INSTRUCTIONS 1. Describe how to get all executive management team members together quickly. 2. In groups of five, role-play holding an executive team meeting. Each student will be a manager: Marketing, Accounting, Personnel, Facilities, or Purchasing. List your department’s concerns about going public.

World Federation of Exchanges The World Federation of Exchanges (WFE) is the trade organization for regulated securities markets and organizations that serve the industry. Over 97 percent of the world’s exchanges belong to the WFE, including the New York Stock Exchange and the Tokyo Stock Exchange. Enforcement, trading policies, business conduct, and self-regulation are a few of the issues that it studies. INSTRUCTIONS Locate the WFE Web site and describe its general mission.

Your Investment Choices In some ways your future depends on how well you plan for financial security. You can make wiser investment decisions when you know the choices available. PERSONAL FINANCE ACTIVITY Use the library or Internet to find basic information about stock, bond, and real estate investments. Explain which investment most appeals to you and why. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 21.

Evaluating Stockholders’ Equity The statement of stockholders’ equity provides details about changes in the stockholders’ equity accounts during the period. This information helps investors and analysts better understand the company’s capital. Successful companies earn money for future operations (reported as retained earnings) Why Invest? through sales and rely less on raising new Not all companies pay capital through the issuance of stock. dividends. So, why invest? Visit INSTRUCTIONS Use PETsMART’s statement of glencoeaccounting stockholders’ equity in Appendix F to answer .glencoe.com and click on Student Center. Click on these questions. WebQuest and select Unit 4 to 1. Explain how retained earnings changed continue your Internet project. from a balance of $40,239,000 in 2003 to a balance of $174,053,000 in 2004. 2. How much did additional paid-in capital increase during this same time?

glencoeaccounting.glencoe.com

612-637_CH21_868829.indd 637

CHAPT E R 21

Chapter 21 Real-World Applications and Connections

637

4/17/06 7:10:23 AM

UNIT 5

Accounting for Special Procedures

Personal Finance Q & A Q: I already know the accounting cycle; why do I need to learn special procedures? A: A lot happens in Step 2 of the accounting cycle: Analyze each transaction. Many transactions are not as straightforward as those discussed so far. Q: Can I continue to use the same method to analyze transactions? A: Yes, and also use the basic accounting assumptions such as the matching principle, revenue recognition, and accounting period. THINK IT OVER Do you think individuals have special financial activities in their personal lives? Name some financial activities an individual or family might experience that are not everyday occurrences. 638

638-639_UN05_868829.indd 638

4/6/06 6:33:09 PM

Internet Project The Magic of Matching A company can pay millions of dollars for an office building. A small business might buy just a used truck and a computer, as Roadrunner Delivery Service did in Unit 2. In this project you will find out how to use the matching principle to assign asset costs to the revenue they generate. Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on WebQuest and select Unit 5. Begin your WebQuest by reading the Task. Continue working on your WebQuest as you study Unit 5. Chapter 23 24 Page

25

695 725 749

THE BIG PICTURE PRICEY PLACES Most expensive areas for commercial real estate. CITY

LONDON, WEST END

RENT, PER SQUARE FOOT

$137.31

TOKYO

102.56

PARIS

89.28

NEW YORK, MIDTOWN

71.53

MOSCOW

67.73

Data: Cushman & Wakefield

Source: Reprinted by permission from BusinessWeek.

glencoeaccounting.glencoe.com

638-639_UN05_868829.indd 639

639

4/6/06 6:33:27 PM

CH A P T ER 2 2

Cash Funds BEFORE YOU

READ

What You’ll Learn

Predict

1.

Record the entry to establish a change fund.

2.

Prove the cash in the cash register drawers each business day.

1. 2. 3. 4.

3.

Open and replenish a petty cash fund.

4.

Journalize opening a petty cash fund.

5.

Prepare a petty cash requisition to replenish the petty cash fund.

6.

7. 8.

9.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business PROTECTING CASH

Applebee’s International Applebee’s International owns restaurants with great

Use a petty cash register to record petty cash disbursements.

food and work environments. Applebee’s is a People Report™

Journalize replenishing a petty cash fund.

support their efforts to give back to the community.

Determine whether cash is short or over, and record the shortage or overage.

Applebee’s, so you can imagine its daily cash inflow.

Define the accounting terms introduced in this chapter.

record retention. Restaurants keep cash on hand to make

Why It’s Important

fees or office supplies. Accounting for and protecting this cash

▲

Cash is an asset, and it must be protected.

“Heart of the Workplace Award” winner. This honor is given to companies that go the extra mile to care for employees and The average guest spends about $10 on a meal at Applebee’s employees follow company rules for all financial transactions, including specific policies for cash control and change for customers and pay for small expenses like delivery is an important function in managing each restaurant.

What Do You Think? What documentation should businesses like Applebee’s International keep for small cash payments?

640

Chapter 22 Cash Funds

640-667_CH22_868829.indd 640

4/6/06 6:30:22 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Waiters and waitresses are important employees in the restaurant industry. A portion of their earnings is likely to be cash tips from their customers. Businesses that take in significant cash need to protect their money from theft or loss. You will learn about the records used to account for cash funds in this chapter.

Personal Connection 1. What measures does your workplace take to protect cash? 2. If you were a store manager, how would you prevent employee theft of cash?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 22 to learn more about the real-world workplace.

glencoeaccounting.glencoe.com

640-667_CH22_868829.indd 641

641

9/17/05 1:25:58 PM

The Change Fund

SECTION 1

BEFORE YOU

READ

Main Idea

Some businesses keep cash on hand to make change for customers. The accounts used for this cash are Change Fund and Cash Short & Over.

Read to Learn… ➤ how and why to set up a

change fund. (p. 642) ➤ how to use the change fund. (p. 643) ➤ how to record a discrepancy in the change fund. (p. 644)

Key Terms change fund

In earlier chapters you learned that businesses use checking accounts for depositing cash receipts and making cash payments. Merchandising businesses, such as Sears or Blockbuster, keep some cash on hand so that they can make change for customers who pay for purchases with cash.

Establishing a Change Fund What Is a Change Fund? A change fund is an amount of money, consisting of varying denominations of bills and coins, that is used to make change in cash transactions. For example, a customer who pays for a $13.80 purchase with a $20 bill will receive $6.20 in change. When a business first establishes a change fund, the amount needed for the fund is estimated. The size of the fund does not change unless the business finds that it needs more or less change than it had originally estimated. The change fund is established by writing a check for the amount of the fund. The check is made payable to the person in charge of the change fund. That person cashes the check and places the bills and coins in the cash register drawer. The transaction is recorded in an asset account called Change Fund. Let’s look at On Your Mark’s establishment of a change fund as an example.

B u s i n e s s Tr a n s a c t i o n On May 1 the accountant for On Your Mark wrote Check 2150 for $100 to establish a change fund. ANALYSIS

Identify Classify
/

DEBIT-CREDIT RULE

642

1. The accounts affected are Change Fund and Cash in Bank. 2. Both Change Fund and Cash in Bank are asset accounts. 3. Change Fund is increased by $100. Cash in Bank is decreased by $100.

4. Increases to asset accounts are recorded as debits. Debit Change Fund for $100. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $100.

Chapter 22 Cash Funds

640-667_CH22_868829.indd 642

9/21/05 1:26:11 PM

T ACCOUNTS

6.

Change Fund Debit  100

JOURNAL ENTRY

Cash in Bank

Credit


Credit
100

Debit 

7. GENERAL JOURNAL DATE 1 2

20-May

3 4

DESCRIPTION

POST. REF.

PAGE DEBIT

32

CREDIT 1

1 Change Fund Cash in Bank Check 2150

1 0 0 00

2

1 0 0 00

4

5

5

If the business needs to increase the amount in the change fund, the accountant writes a check for the amount of the cash increase. For example, suppose that On Your Mark needs to increase the change fund from $100 to $125. The amount of the check is $25. The journal entry debits Change Fund for $25 and credits Cash in Bank for $25. This brings the Change Fund account balance to $125.

Using the Change Fund

AS YOU

READ

In Your Experience

How Do You Use the Change Fund? The amount of cash in the change fund is put into the cash register drawer at the beginning of the day. When a cash sale occurs, the salesclerk rings the sale on the cash register. The sale is automatically recorded on the cash register tape. At the end of the day, the cash in the cash register drawer is counted. A cash proof is prepared to verify that the amount of cash in the drawer equals the total cash sales for the day plus the change fund. The amount of cash in the change fund is set aside for use as change for the next day. The balance of the cash from the drawer is deposited in the checking account. Let’s look at an example. Suppose On Your Mark has $470 in the cash register drawer at the end of the day on May 15. The cash register tape shows that cash sales, including sales tax, total $370. Figure 22–1 on page 644 shows the cash proof. As you can see, the amount of cash in the drawer at the end of the day minus the amount of cash in the change fund equals the total sales shown on the cash register tape. Most businesses require that salesclerks sign the cash proof to indicate that they have counted the cash in the drawer and verified its accuracy, both when they receive the drawer and turn it in. The supervisor also checks these amounts and signs the cash proof. The cash proof form is attached to the cash register tape, which is the source document for recording the cash sales for the day.

Change How do you verify that the change you receive from a clerk after a purchase is correct?

Section 1 The Change Fund

640-667_CH22_868829.indd 643

3

643

9/17/05 1:26:21 PM

CASH PROOF Date

May 15, 20--

Cash Register No.

May 15 Tape 71

Total cash sales (from cash register tape) Cash in drawer

348.00 CA 22.00 ST 370.00

$

Less change fund

1

370.00

$

470.00 100.00

Net cash received

$ 370.00

Cash short Cash over

Salesclerk

Figure 22–1 Cash Proof Form

Supervisor

Tom Blake Greta Keegan

Recording Cash Short and Over What If Cash in the Drawer Does Not Match the Records?

Connect to…

SCIENCE

Science has provided technology to make counterfeiting money more difficult. Some technology used with $50 notes includes • a watermark imbedded in the paper • a security thread in the paper that glows yellow under an ultraviolet light • color shifting ink that changes from copper to green based on the viewing angle

644

Many cash transactions occur during each business day. Occasionally, a salesclerk makes an error and gives the incorrect amount of change to a customer. When this happens, the amount of cash in the cash register drawer, less the beginning change fund, does not agree with the cash sales amount recorded on the cash register tape. If the salesclerk gives a customer too much change, the amount of cash in the drawer at the end of the day is short, or less than it should be. If the salesclerk gives a customer too little change, the cash amount is over, or more than it should be. The amount of cash either gained or lost because of errors is recorded in the Cash Short & Over account. Cash Short & Over is a temporary account. Because cash shortages are expenses to the business, they are recorded as debits to Cash Short & Over. Cash overages are revenue for the business; they are recorded as credits to the Cash Short & Over account. Note that the Cash Short & Over account does not have a normal balance. Cash Short & Over Debit Cash Shortages

Credit Cash Overages

At the end of the accounting period, the balance of the Cash Short & Over account is closed to Income Summary. Let’s look at an example of a shortage.

Chapter 22 Cash Funds

640-667_CH22_868829.indd 644

9/17/05 1:26:24 PM

B u s i n e s s Tr a n s a c t i o n On May 2 the cash register tape shows that cash sales are $520 and sales taxes are $26, for a total of $546. The actual cash in the cash register drawer, after subtracting the amount of the change fund, is $545. T ACCOUNTS

Cash in Bank

Cash Short & Over

Credit


Debit  545

1 Sales

Debit


JOURNAL ENTRY

Credit

Debit

Sales Tax Payable Credit  520

Credit  26

Debit


GENERAL JOURNAL DATE 1 2 3 4 5 6

20-May

DESCRIPTION

POST. REF.

PAGE DEBIT

33

CREDIT 1

2 Cash in Bank Cash Short & Over Sales Sales Tax Payable Cash Proof—Cash reg. tape

5 4 5 00 1 00

2 3

5 2 0 00 2 6 00

5 6

7

7

The journal entry to record a cash overage is similar to that for a cash shortage. The only difference is that Cash Short & Over is credited for the amount of the overage. In the previous example, suppose that the amount of cash in the drawer is $547 after the amount of the change fund is subtracted. The journal entry would debit Cash in Bank for $547 and credit Cash Short & Over for $1. The credits to Sales and Sales Tax Payable remain the same.

AS YOU

READ

Instant Recall Debit-Credit Rules Expenses are increased by debits. Revenue is increased by credits.

Section 1 The Change Fund

640-667_CH22_868829.indd 645

4

645

9/17/05 1:26:25 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea A business that uses a cash register prepares a cash proof each day. Create a diagram similar to this one to show the step-by-step method for proving cash and recording any discrepancy.

0ROVING#ASH

Do the Math The Children’s Consignment Shop operates primarily with cash transactions. One of your responsibilities is to prove cash register cash. The cash register tape showed cash received from sales and sales taxes collected to be $620.40. The count of cash in the drawer was: 16 $20 bills, 18 $10 bills, 26 $5 bills, 44 $1 bills, 66 quarters, 30 dimes, 52 nickels, and 130 pennies. The change fund is $75 dollars. What was the net cash received? Was cash short, over, or in balance? If the total sales tax Rate is 10%, what is the amount of cash sales and the sales tax payable?

Problem 22–1 Preparing a Cash Proof The change fund for Messina’s Grocery Store is $200 per cash register. On March 31 total cash sales from cash register 6 are $964 and sales taxes are $57.84. A count of cash shows $1,216.84 in the cash register drawer.

Instructions

Mar 31 Tape 49 964.00 CA 57.84 ST

1. Use the form in your working papers to prepare a cash proof. Sign your name as the salesclerk. 2. Record the March 31 cash sales on page 2 of a general journal.

Problem 22–2 Recording a Cash Overage The change fund for Visions Hair Salon is $300 per register. On April 14, at the end of the business day, the manager counts the funds in the register. Cash sales total $1,496 and sales taxes amount to $89.77 in register 2. The cash drawer contains $1,895.77.

Instructions 1. Use the form in your working papers to prepare a cash proof. Sign your name as the salesclerk. 2. Record the April 14 cash sales and overage on page 4 of the general journal. 646

Chapter 22 Cash Funds

640-667_CH22_868829.indd 646

9/17/05 1:26:34 PM

The Petty Cash Fund

SECTION 2

Businesses often make small cash payments for delivery fees, postage stamps, supplies, and other similar purchases.

Establishing the Petty Cash Fund

BEFORE YOU

READ

Main Idea

What Is a Petty Cash Fund? Small, incidental cash payments are made from the petty cash fund . The word petty indicates that only small amounts of cash are paid out of this fund. When setting up a petty cash fund, each business determines the maximum amount that will be paid out by a petty cash disbursement. A petty cash disbursement is any payment made from the petty cash fund. All payments over the maximum amount are paid by check. The person responsible for maintaining the petty cash fund and for making cash disbursements is called the petty cashier . To establish a petty cash fund, a business estimates the amount of cash needed in the fund for a certain period of time, usually a month. This estimate is based on the company’s past experiences. On Your Mark decides to establish a petty cash fund. Crystal Casteel, an office clerk, is appointed petty cashier. The petty cash fund will contain $100. Any payments under $10 will be paid from the petty cash fund. Any payments over $10 will be paid by check. The company accountant, Greta Keegan, prepares a check for $100, payable to “Petty Cashier Crystal Casteel,” to establish the fund. The transaction is recorded in an asset account called Petty Cash Fund. Crystal cashes the check and places the money, consisting of small denominations of bills and coins, in a petty cash box. For internal control purposes, the petty cash box is kept in an office safe or a locked desk drawer. Crystal is responsible for the $100 in the petty cash fund. When members of the staff need small amounts of cash for items like stamps or office supplies, Crystal will disburse the cash and store the receipts in the petty cash box. Let’s learn how to journalize transactions to open a petty cash fund.

Businesses use petty cash funds because writing checks for small amounts is impractical, costly, and time consuming.

Read to Learn… ➤ how and why to set up a

petty cash fund. (p. 647) ➤ how to use the petty cash

fund. (p. 648) ➤ how to record a

discrepancy in the petty cash fund. (p. 653)

Key Terms

petty cash fund petty cash disbursement petty cashier petty cash voucher petty cash requisition petty cash register

B u s i n e s s Tr a n s a c t i o n On May 1 Check 2151 for $100 was issued to establish the petty cash fund. ANALYSIS

Identify Classify
/

1. The accounts affected are Petty Cash Fund and Cash in Bank. 2. Both Petty Cash Fund and Cash in Bank are asset accounts. 3. Petty Cash Fund is increased by $100. Cash in Bank is decreased by $100.

Section 2 The Petty Cash Fund

640-667_CH22_868829.indd 647

647

9/17/05 1:26:37 PM

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Petty Cash Fund for $100. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $100.

T ACCOUNTS

6.

Debit  100

Credit


7.

JOURNAL ENTRY

Cash in Bank

Petty Cash Fund

Credit
100

Debit 

GENERAL JOURNAL DATE

5 6 7

May

DESCRIPTION

POST. REF.

1 Petty Cash Fund Cash in Bank Check 2151

PAGE DEBIT

32

CREDIT

1 0 0 00

5

1 0 0 00

8

6 7 8

Sometimes petty cash disbursements occur more often than expected, and the petty cash fund is used up before the end of the specified time period. If this happens often, the company may decide to increase the fund’s amount. To increase the petty cash fund, the accountant debits the Petty Cash Fund account and credits the Cash in Bank account for the amount of the increase.

Using the Petty Cash Fund How Do You Use the Petty Cash Fund? The petty cashier is responsible for making payments from the petty cash fund. Whenever a cash payment is made, a petty cash voucher is completed. A petty cash voucher is a proof of payment from the petty cash fund. Figure 22–2 shows a petty cash voucher. These vouchers are usually prenumbered. If they are not, the petty cashier numbers them when issuing them. The petty cash voucher includes the following information: 1. 2. 3. 4. 5. 6.

the date of the payment the person or business to whom the payment is made the amount of the payment the reason for the payment the account to be debited the signature of the person approving the payment (usually the petty cashier) 7. the signature of the person receiving the payment After the petty cash disbursement is made, the voucher is filed in the petty cash box until the fund is reimbursed. 648

Chapter 22 Cash Funds

640-667_CH22_868829.indd 648

9/17/05 1:26:39 PM

PETTY CASH VOUCHER

1

No. 001

2

Paid to

Date

Premier Office Supply Co.

May 2, 20-3 $ 7.10

4 Printer paper

For

5

Account

Supplies

Approved by

6

Payment received by

Crystal Casteel

7

John Marks

Figure 22–2 Petty Cash Voucher

Replenishing the Petty Cash Fund To replenish a petty cash fund means to restore the fund to its original cash balance. As the cashier makes payments from the fund, the amount of cash in the petty cash box decreases. Some businesses set a minimum amount that must be kept. When the amount of cash in the petty cash box reaches the minimum or a low amount, the accountant replenishes the petty cash fund. On Your Mark replenishes its petty cash fund once a month, when the balance reaches the minimum amount, or at the end of the accounting period. Replenishing the petty cash fund affects the general ledger accounts that the petty cash disbursements impact (such as Supplies and Delivery Fees), which must be updated. Replenishing the petty cash fund requires reconciling the cash balance in the fund and then preparing a petty cash requisition form.

Reconciling the Petty Cash Fund The petty cashier reconciles the petty cash fund to determine whether it is in balance. To reconcile the petty cash fund, the petty cashier first adds all paid petty cash vouchers. This total is then subtracted from the original cash balance of the petty cash fund. The difference is the reconciled petty cash balance, or the amount of money that should be in the petty cash box. If the count of the cash in the petty cash box agrees with the reconciled balance, the petty cash fund is in balance. If the two amounts do not agree, the petty cash fund is either short or over. On May 31 the total of all the petty cash vouchers for the month was $87.75. As you recall, the original petty cash balance was $100. The reconciled petty cash balance is:

Original balance Total of paid petty cash vouchers Reconciled petty cash balance

$100.00
87.75 $ 12.25

The amount of cash in the petty cash box that Crystal counted was $12.25. The petty cash fund, therefore, is in balance.

Section 2 The Petty Cash Fund

640-667_CH22_868829.indd 649

649

9/17/05 1:26:40 PM

Preparing a Petty Cash Requisition Form After reconciling the petty cash fund, the petty cashier prepares a petty cash requisition , which is a form requesting money to replenish the petty cash fund. Figure 22–3 shows a typical petty cash requisition. This form serves as the source of information for the check written to replenish the petty cash fund. The check stub then serves as the source document for the entry recorded in the general journal. To prepare the petty cash requisition, the petty cashier first sorts the paid petty cash vouchers by account and PETTY CASH REQUISITION totals the vouchers for each account. The cashier records the account title and total amount to be debited to it on the petty cash requisition. Review Figure 22–3 again. During May On Your Mark made petty cash disbursements affecting the general ledger accounts Supplies, Delivery Expense, Supplies $24.45 Delivery Expense 19.00 Miscellaneous Expense, and Advertising Expense. Miscellaneous Expense 29.50 The total of all paid petty cash vouchers is the amount of Advertising Expense 14.80 cash needed to replenish the petty cash fund. After receiving the petty cash requisition from the petty cashier, the accountant writes a check for the total of the paid vouchers. The $87.75 check is made payable to the petty cashier, who cashes the check and places the money in the petty cash box.

Accounts for which

payments were made:

Amount

TOTAL CASH NEEDED TO REPLENISH FUND

Requested by:

Approved by:

Crystal Casteel Greta Keegan

Date

Date

5/31/20-5/31/20-2341

Using a Petty Cash Register

Some businesses use a petty cash register to record all disbursements made from the petty cash fund. The petty cash register is a supplemental record that summarizes the types of petty cash disbursements. It is not an accounting journal because amounts from it are not posted to general ledger accounts.

Check No.

Figure 22–3 Petty Cash Requisition

Recording Petty Cash Vouchers in a Petty Cash Register.

AS YOU

READ

Compare and Contrast Change Fund and Petty Cash Fund How is a petty cash fund similar to a change fund? How is it different?

650

Not all businesses that have a petty cash fund use a petty cash register. Those who do might use a form similar to that shown in Figure 22–4. This illustration shows a typical petty cash register with vouchers recorded. It shows the month’s disbursements following the fund’s establishment. The establishment of the petty cash fund on May 1 is noted on line 2 of the register. On each line that follows, each petty cash payment is identified by date, voucher number, and a brief explanation. The amount of each disbursement is entered in the Payments column and in the appropriate Distribution of Payments column. The register has three special amount columns: Supplies, Delivery Expense, and Miscellaneous Expense. The General Amount column is used for petty cash payments that do not belong in one of the three special amount columns. This column has two subdivisions, one for the account name and the other for the amount. Totaling and Proving the Petty Cash Register. Replenishing the petty cash fund requires totaling and proving the petty cash register. Refer to Figure 22–4 as you read the following steps on totaling and proving a petty cash register: 1. Enter the date the fund is being replenished in the Date column. Also enter the word Totals in the Description column.

Chapter 22 Cash Funds

640-667_CH22_868829.indd 650

9/17/05 1:26:45 PM

2. Single rule the amount columns. 3. Foot each amount column. 4. Verify that the total of the Payments column is equal to the total of the Distribution of Payments columns.

Payments

$87.75 5. 6.

7. 8.



Distribution of Payments $24.45 Supplies 19.00 Delivery Expense 29.50 Miscellaneous Expense 14.80 Advertising Expense $ 87.75

Once verified, the totals are recorded below the footings. Draw a double rule under the amount columns to show that the totals have been proved. You will now enter the petty cash fund replenishment information. Skip one line, and then enter the reconciled petty cash balance (the amount of cash that should be in the petty cash box before it is replenished). For On Your Mark, that amount is $12.25. On the next line, write the amount of the check written to replenish the petty cash fund. Add the balance that should be in the petty cash fund and the amount of the check. The sum should equal the original amount of the petty cash fund. PETTY CASH REGISTER

1

PAGE DISTRIBUTION OF PAYMENTS

DATE

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

20-May 1 2 3 4 5 7 8 10 12 16 18 20 22 26 29 30 31

VOU. NO.

DESCRIPTION

PAYMENTS

SUPPLIES

DELIVERY EXPENSE

MISC. EXPENSE

GENERAL ACCOUNT NAME

AMOUNT 1

— 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Est. Petty Cash ($100) Printer paper Postage on incoming mail Newspaper Ad. Gas & Parking Daily newspaper Collect telegram Pens and pencils Dara’s Delivery Service Daily newspaper Memo pads Postage stamps Ad in H.S. yearbook File folders Dara’s Delivery Service Gas & tolls Totals

2

7 10 2 50 9 80 9 50 3 50 1 25 2 50 9 50 3 50 8 45 1 00 5 00 6 40 9 50 8 25

8 7 75

8 7 75

7 10

3

2 50

4

9 80

Adv. Expense 9 50 3 50 1 25

6 7 8

2 50

9

9 50

10

3 50

11

8 45

12

1 00

13

5 00

Adv. Expense 6 40

2 4 45

1 9 00

1 9 00

16

8 25

2 9 50

2 9 50

1 4 80

1 4 80

19 20 21 22

14 15

9 50 2 4 45

5

17 18 19

Reconciled bal. Replen. check Total

$ 12.25 87.75 $100.00

20 21 22

23

23

Figure 22–4 A Typical Petty Cash Register Section 2 The Petty Cash Fund

640-667_CH22_868829.indd 651

651

9/17/05 1:26:45 PM

AS YOU

READ

Key Point Petty Cash Fund There are only two instances when the Petty Cash Fund account is debited. • to initially establish the fund • to increase the amount of money in it

As you can see, the petty cash register helps the petty cashier keep track of the petty cash disbursements by account. When the petty cash fund is replenished, the totals of the special columns and the amounts recorded in the General column are listed on the petty cash requisition form.

Using a Petty Cash Envelope Small businesses sometimes use petty cash envelopes to record petty cash disbursements. A form very similar to the petty cash register is printed on the front of the petty cash envelope. Petty cash disbursements are recorded on the form on the envelope. The paid petty cash vouchers are placed in the petty cash envelope. When the petty cash fund is replenished, the petty cash envelope, containing all paid vouchers for the period, is sealed and filed. A new envelope is used to record the next period’s petty cash disbursements.

Journalizing the Check to Replenish the Petty Cash Fund The check stub and the petty cash requisition are the source documents for recording the journal entry for a check written to replenish the petty cash fund. Let’s learn how to journalize transactions to replenish a petty cash fund. Notice that this transaction does not affect the Petty Cash Fund account. Replenishing petty cash requires crediting Cash in Bank and debiting the accounts for which petty cash payments were made.

B u s i n e s s Tr a n s a c t i o n On May 31 Check 2341 is written to replenish the petty cash fund. ANALYSIS

Identify Classify


/

DEBIT-CREDIT RULE

652

1. The accounts affected are Supplies, Delivery Expense, Miscellaneous Expense, Advertising Expense, and Cash in Bank. 2. Supplies is an asset account. Delivery Expense, Miscellaneous Expense, and Advertising Expense are expense accounts. Cash in Bank is an asset account. 3. Supplies is increased by $24.45. Delivery Expense is increased by $19. Miscellaneous Expense is increased by $29.50. Advertising Expense is increased by $14.80. Cash in Bank is decreased by $87.75.

4. Increases in asset accounts are recorded as debits. Debit Supplies for $24.45. Increases in expense accounts are recorded as debits. Debit Delivery Expense for $19; and Miscellaneous Expense for $29.50. Debit Advertising Expense for $14.80. 5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $87.75.

Chapter 22 Cash Funds

640-667_CH22_868829.indd 652

9/21/05 1:26:25 PM

T ACCOUNTS

6.

Delivery Expense

Supplies

Advertising Expense

Miscellaneous Expense

Credit


Debit  14.80

Credit


Debit  29.50

Credit


Debit  19.00

Credit


Debit  24.45

Cash in Bank Debit 

JOURNAL ENTRY

Credit
87.75

7. GENERAL JOURNAL DATE 1 2 3 4 5 6 7

POST. REF.

DESCRIPTION

20-May 31 Supplies Delivery Expense Miscellaneous Expense Advertising Expense Cash in Bank Check 2341

PAGE DEBIT

41

CREDIT 1

2 4 45 1 9 00 2 9 50 1 4 80

2 3 4 5

8 7 75

6 7

8

8

Handling Cash Short and Over in the Petty Cash Fund How Do You Handle Shortages and Overages in the Petty Cash Fund? The petty cashier could occasionally make an error when paying cash from the petty cash fund. This will cause the amount of cash in the petty cash box not to agree with the reconciled petty cash balance. Any amounts of cash gained or lost through errors made by the petty cashier are recorded in the Cash Short & Over account. Let’s look at an example. At the end of June, Crystal Casteel, On Your Mark’s petty cashier, classified and totaled the petty cash vouchers. The accounts affected by the petty cash disbursements follow: Supplies Delivery Expense Miscellaneous Expense Advertising Expense

$15.75 20.45 21.80 25.00 83.00

AS YOU

READ

In Your Own Words Handling Cash Short and Over The journal entry to replenish the petty cash fund debits various accounts, sometimes including Cash Short and Over. Why debit these accounts rather than the petty cash fund account?

Section 2 The Petty Cash Fund

640-667_CH22_868829.indd 653

653

9/17/05 1:27:18 PM

GENERAL JOURNAL DATE 1 2

20-June

3 4 5 6

Figure 22–5 Journal Entry to Replenish the Petty Cash Fund

7

POST. REF.

DESCRIPTION

PAGE DEBIT

43

CREDIT 1

30 Supplies Delivery Expense Miscellaneous Expense Advertising Expense Cash Short & Over Cash in Bank

15 20 21 25 1

75 45 80 00 50

2 3 4 5 6

8 4 50

8

7 8

The June petty cash disbursements totaled $83. Crystal then reconciled the petty cash fund.

Original balance Total of paid petty cash vouchers Reconciled petty cash balance

Figure 22–6 Recording a Cash Shortage in the Petty Cash Register

$100  83 $ 17

Crystal counted the cash in the petty cash box and found only $15.50— a shortage of $1.50 ($17.00  15.50). Bringing the petty cash fund up to the original $100.00 requires $84.50 ($83.00  $1.50). The $1.50 cash shortage is an expense and is debited to the Cash Short & Over account. When Crystal prepared the petty cash requisition form, she listed the accounts to be debited for the petty cash disbursements. She also indicated that the Cash Short & Over account is to be debited for $1.50. The journal entry to record the replenishment is shown in Figure 22–5. A petty cash overage is recorded in a similar manner. If, for example, the cash in the petty cash box is $17.75, a cash overage of 75¢ exists. Cash Short & Over is credited for that amount in the journal entry. Instead of needing $83.00 to replenish the fund, only $82.25 is required. The cash shortage or overage is also reported in the petty cash register if a business uses one. Figure 22–6 shows how the June cash shortage of $1.50 is recorded in the petty cash register.

PETTY CASH REGISTER

2

PAGE DISTRIBUTION OF PAYMENTS

DATE

1 2

VOU. NO.

DESCRIPTION

20-June 1 16 Postage stamps

14 15

30 29 Button 30 Totals

16

SUPPLIES

DELIVERY EXPENSE

MISC. EXPENSE

GENERAL ACCOUNT NAME

AMOUNT 1

5 00 1 25

8 3 00

8 3 00

5 00 1 5 75

1 5 75

2 0 45

2 0 45

2 1 80

2 1 80

2

Adv. Expense

1 25

14

2 5 00

15

2 5 00

16

Reconciled bal. $ 17.00 Cash short (1.50) Replen. check 84.50 Total $100.00

17 18 19 20 21

654

PAYMENTS

17 18 19 20 21

Chapter 22 Cash Funds

640-667_CH22_868829.indd 654

4/6/06 6:31:06 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea The journal entry to replenish the petty cash fund depends on whether the fund is in balance, over, or short. Use a diagram like this one to show the three possible journal entries using the accounts Cash in Bank, Supplies, Delivery Expense, Miscellaneous Expense, and Cash Short and Over.

4RANSACTION$ESCRIPTION

!CCOUNT$EBITED

!CCOUNT#REDITED

Do the Math It is another busy day at Olde Time Swimming Hole, a private swimming facility for your neighborhood. You have a summer job running the concession stand, and you maintain the petty cash fund. To make your accounting easier, you record the cash sales and the petty cash transactions in one report at the end of the day. You always attach the cash register tape to prove the cash drawer. Using the following figures, determine the revenue and expenses for the day. How much money will remain in the cash drawer? Opening cash drawer Petty cash fund Cash sales Pool supplies bought Photocopy paper purchased

$225 100 600 55 8

Problem 22–3 Analyzing a Source Document The petty cash clerk for Riddle’s Card Shop prepared the accompanying petty cash requisition.

Instructions Review

the document and prepare Check 973 to replenish the petty cash fund in your working papers.

PETTY CASH REQUISITION Accounts for which payments were made:

Amount

Office Supplies Postage Expense Misc. Expense Cash Short and Over

$12.40 12.00 16.00 ( .89)

TOTAL CASH NEEDED

$39.51

TO REPLENISH FUND

Requested by:

Approved by:

Brent Roy Hugh Morrison

Date

2/28/20--

Date

Check No.

941

Section 2 The Petty Cash Fund

640-667_CH22_868829.indd 655

655

9/17/05 1:27:21 PM

Summary

CH A P T ER 2 2 Key Concepts

1. A change fund is the money used to make change for cash transactions. To establish a change fund, write a check for the fund amount payable to the person in charge of the fund. This person will cash it and place the money in the designated cash register drawer. Here is the entry to establish a change fund: GENERAL JOURNAL DATE 1 2

20-Date

3

POST. REF.

DESCRIPTION

PAGE DEBIT

CREDIT 1

Change Fund Cash in Bank

x x x xx

2

x x x xx

4

3 4

2. At the end of each business day, a cash proof is prepared to reconcile the amount of cash in the register to the recorded cash sales. To prove cash, count the cash in the cash register drawer, subtract the change fund, and compare that amount with the amount of total cash sales, shown on the cash register tape. Counted cash in cash register drawer




Total cash sales from cash register tape



Change Fund

If the two amounts do not agree, the shortage or overage is recorded in the Cash Short & Over account. Cash Short & Over

Debit Cash Shortages

Credit Cash Overages

3. A petty cash fund is the cash a business has on hand for making small, incidental cash payments. To open a petty cash fund: • Estimate the amount of cash needed in the fund for a specific period. • Write a check to the petty cashier, who is responsible for the cash. • Record the transaction in the asset account Petty Cash Fund. A petty cash fund is replenished by restoring the fund to its original amount. The cash balance in the fund must be reconciled with the petty cash vouchers and then a petty cash requisition form is prepared to replenish it. 4. Here is the entry to establish a petty cash fund: GENERAL JOURNAL DATE 1 2

20-Date

3 4

656

DESCRIPTION

POST. REF.

PAGE DEBIT

CREDIT 1

Petty Cash Fund Cash in Bank

x x x xx

2

x x x xx

3 4

Chapter 22 Summary

640-667_CH22_868829.indd 656

9/17/05 1:27:24 PM

Summary

C HAPT E R 22

5. The petty cashier prepares a petty cash requisition form to request that the petty cash fund be replenished. The petty cash requisition includes this information: • Name and total of each account for which payments were made • Total amount of cash needed to replenish the fund 6. In some businesses, the petty cashier records petty cash disbursements in a petty cash register. The following is recorded for each petty cash payment: • • • •

date voucher number brief explanation for the payment amount paid

7. The journal entry to replenish a petty cash fund depends on its balance. • If petty cash has no shortages or overages: Debit: Various Assets and Expenses

Credit: Cash in Bank

• If petty cash has a shortage: Debit: Various Assets and Expenses

Credit: Cash in Bank

Debit: Cash Short & Over • If petty cash has an overage: Debit: Various Assets and Expenses

Credit: Cash in Bank Credit: Cash Short & Over

8. At the end of each business day, a cash proof is prepared to reconcile the cash in the register to the recorded cash sales. • To record a cash shortage: Debit: Cash in Bank

Credit: Sales

Debit: Cash Short & Over

Credit: Sales Tax Payable

• To record a cash overage: Debit: Cash in Bank

Credit: Sales Credit: Sales Tax Payable Credit: Cash Short & Over

Key Terms change fund

(p. 642)

petty cash requisition

(p. 650)

petty cash disbursement

(p. 647)

petty cash voucher

(p. 648)

petty cash fund

(p. 647)

petty cashier

(p. 647)

petty cash register

(p. 650)

Chapter 22 Summary

640-667_CH22_868829.indd 657

657

9/17/05 1:27:28 PM

C H A P T ER 2 2 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

8.

Change Fund a. What is a change fund? b. Which accounts are debited and credited when a change fund is established? Cash Register Proof a. When is the amount in the cash register proved? b. How is the cash register proof performed? Petty Cash Fund a. Why would a business set up a petty cash fund? b. Explain the procedure for replenishing the petty cash fund. Opening a Petty Cash Fund a. Which accounts are debited and credited to establish a petty cash fund? b. To whom is the check to establish a petty cash fund made payable? Petty Cash Requisition a. What is a petty cash requisition? b. Explain how to prepare a petty cash requisition. Petty Cash Register a. What information is included on each line of the petty cash register? b. Why is the petty cash register not considered a journal? Replenishing a Petty Cash Fund a. What is meant by reconciling the petty cash fund? b. What accounts are debited when replenishing a petty cash fund? Cash Short and Over a. When does a cash shortage occur? b. Explain why a cash shortage is treated like an expense.

Apply Key Terms As the financial manager of The Tennis Center, you believe a petty cash fund should be established. Using these terms, prepare a one-page memorandum to convince your boss, Megan Long, to open a petty cash fund. change fund petty cash disbursement petty cash fund

658

petty cash register petty cash requisition petty cash voucher petty cashier

Chapter 22 Review and Activities

640-667_CH22_868829.indd 658

9/17/05 1:27:30 PM

Computerized Accounting

C HAPT E R 22

Maintaining Cash Funds Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Maintaining the check register

• A check stub or deposit slip is the source document for journalizing cash payments. • Add deposits/deduct the checks to keep a running balance in the check register.

• Checks and deposits are automatically entered in the check register when transactions are journalized and posted. • The checking account balance is updated as each transaction is posted.

Reconciling the bank statement

• Compare the check register with the bank statement. • Add deposits in transit to the statement balance. Deduct outstanding checks. • Deduct bank charges from the check register. • Journalize and post bank charges.

• Enter the bank statement balance. • Verify outstanding checks and deposits not included on statement. • Record bank charges as a payment.

Q&A Peachtree Question

Answer

How do I review the check register?

1. From the Reports menu, select Accounts Payable. 2. From the Reports list, select Check Register and click Preview. 3. At the Filter window, set the range of checks to be displayed.

How do I reconcile the bank statement?

1. 2. 3. 4. 5. 6.

From the Tasks menu, choose Account Reconciliation. Select the account you wish to reconcile. Enter the bank statement ending balance and date. Mark the Clear box for each check and deposit listed on the statement. Click Adjust to record the journal entry for the service charge. If the unreconciled difference is $0.00, the reconciliation is complete.

QuickBooks Q & A QuickBooks Question

Answer

How do I review the check register?

1. From the Reports menu, select Banking. 2. Select Check Detail, and enter the date range for this report.

How do I reconcile the bank statement?

1. 2. 3. 4. 5. 6.

From the Banking menu, select Reconcile. Select the account you wish to reconcile. Enter the bank statement date and ending balance, and click Continue. Mark each check and deposit that have cleared. If the unreconciled difference is 0.00, the reconciliation is complete. Click Reconcile Now to save the reconciliation.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 22 Computerized Accounting

640-667_CH22_868829.indd 659

659

9/17/05 1:27:37 PM

Problems

C H A P T ER 2 2 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 22–4 1. Select the problem set for Sunset Surfwear (Prob. 22–4). 2. Rename the company and set the system date. 3. Record the entry to establish the change fund using the General Journal Entry option. 4. Manually prepare a cash proof. 5. Record the cash sales using the General Journal Entry option. 6. Print a General Journal report and proof your work. 7. Complete the Analyze activity. 8. End the session.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 22–4 Establishing a Change Fund On February 1 Sunset Surfwear issued Check 115 to establish a change fund of $150. At the end of the business day on February 2, the shop’s cash register tape showed cash sales of $340 plus sales taxes of $17. An actual cash count of the money indicated that $505 was in the cash register drawer.

Instructions 1. Record the entry to establish the change fund on page 1 of the general journal. 2. Prepare a cash proof for Feb. 2. Sign your name on the Salesclerk line. 3. Record the cash sales for Feb. 2 on page 1 of the general journal.

Analyze

Determine whether the shortage or overage represents revenue or expense to the business.

Problem 22–5 Establishing and Replenishing a Petty Cash Fund InBeat CD Shop established a petty cash fund for $100.

Instructions SMART GUIDE Step–by–Step Instructions: Problem 22–5 1. Select the problem set for InBeat CD Shop (Prob. 22–5). 2. Rename the company and set the system date. 3. Record the entry to establish the petty cash fund. 4. Record the entry to replenish the petty cash fund. 5. Print a General Journal report and proof your work. 6. Complete the Analyze activity. 7. End the session.

1. In your working papers, record the entry to establish the petty cash fund on page 6 of a general journal. 2. Record the entry for replenishing the petty cash fund on page 10 of the general journal. There was $5 cash in the petty cash fund box on February 28. Date

Feb.

Transactions

1 Issued Check 112 for $100 to establish the petty cash fund. 28 Issued Check 146 to replenish the petty cash fund. Paid petty cash vouchers included Supplies, $40; Advertising Expense, $16; Maintenance Expense, $27; and Miscellaneous Expense, $12.

Analyze

Conclude whether cash was short or over.

TIP: Use the General Journal Entry option to record the petty cash fund transactions.

660

Chapter 22 Problems

640-667_CH22_868829.indd 660

9/17/05 1:27:39 PM

Problems Problem 22–6 Establishing and Replenishing a Petty Cash Fund Shutterbug Cameras, a camera store, decided to establish a petty cash fund. On February 1 the accountant, Al Rosen, issued Check 1018 for $70 to establish the fund. The following disbursements were made.

Instructions 1. In your working papers, record the entry to establish the petty cash fund on page 9 of a general journal. 2. Make a list of the paid petty cash vouchers. 3. Classify the petty cash disbursements by account. Calculate the total amount paid out for each account. 4. Prepare a petty cash requisition, signing your name as the petty cashier. On February 28 there was $1.50 in the petty cash box. 5. Record the entry in the general journal (page 11) to replenish the petty cash fund on February 28. Use Check 1191. Date

Feb.

Transactions

1 3 5 8 10 12 15 20 22 25 27 28 28

Analyze

Purchased memo pads for the office, $2.75, Voucher 101 (Supplies). Prepared Voucher 102 for a newspaper ad, $7.50 (Advertising Expense). Prepared Voucher 103 for the postage on an outgoing package, $1.75 (Miscellaneous Expense). Paid Dandy Delivery Service $5.65, Voucher 104 (Delivery Expense). Prepared Voucher 105 for pens and pencils, $3.75 (Supplies). Paid $2.20 for postage stamps, Voucher 106 (Miscellaneous Expense). Paid Dandy Delivery Service $6.75, Voucher 107 (Delivery Expense). Paid the news carrier $4.25 for delivery of the daily newspaper, Voucher 108 (Miscellaneous Expense). Bought typing paper for $7.50, Voucher 109 (Supplies). Paid $4.50 to Dandy Delivery Service, Voucher 110 (Delivery Expense). Prepared Voucher 111 for an advertisement, $10 (Advertising Expense). Paid $4.40 for postage stamps, Voucher 112 (Miscellaneous Expense). Prepared Voucher 113 for an advertisement, $7.50 (Advertising Expense). Calculate the total petty cash disbursements for Delivery Expense during February.

C HAPT E R 22 SMART GUIDE Step–by–Step Instructions: Problem 22–6 1. Select the problem set for Shutterbug Cameras (Prob. 22–6). 2. Rename the company and set the system date. 3. Record the entry to establish the petty cash fund. 4. List the petty cash vouchers and then manually prepare a petty cash requisition. 5. Record the entry to replenish the petty cash fund. 6. Print a General Journal report and proof your work. 7. Complete the Analyze activity. 8. End the session.

TIP: Use the General Journal Entry option to record the petty cash fund transactions.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 22–6 1. Restore the Problem 22-6.QBB file. 2. Record the entry to establish the petty cash fund using the Write Checks option. 3. Record the petty cash vouchers using the Use Register option. 4. Record the entry to replenish the petty cash fund using the Write Checks option. 5. Print a Journal report and proof your work. 6. Complete the Analyze activity. 7. Back up your work.

Chapter 22 Problems

640-667_CH22_868829.indd 661

661

9/17/05 1:27:41 PM

Problems

C H A P T ER 2 2

Problem 22–7 Using a Petty Cash Register SOURCE DOCUMENT PROBLEM

Cycle Tech Bicycles decided to establish a petty cash fund. On February 1 the accountant issued Check 3724 for $120 to establish the fund. The following disbursements were made.

Problem 22–7

Instructions

Use the source documents in your working papers to complete this problem.

1. In your working papers, record the entry to establish the petty cash fund in a general journal, page 5. 2. Enter the information about the establishment of the petty cash fund on line 1 of a petty cash register, page 1. 3. Record the petty cash disbursements in the petty cash register. 4. Foot, total, and prove the petty cash register on February 28. 5. Record the petty cash fund replenishment information in the explanation column below the totals. On February 28 there was $4.35 in the petty cash box. 6. Prepare a petty cash requisition form. Use the form provided in your working papers and sign your name as petty cashier. 7. Record the issuance of Check 3875 to replenish the petty cash fund in the general journal, page 8.

SMART GUIDE Step–by–Step Instructions: Problem 22–7 1. Select the problem set for Cycle Tech Bicycles (Prob. 22–7). 2. Rename the company and set the system date. 3. Record the entry to a petty cash fund. 4. Manually record petty cash disbursements. 5. Manually prepare a petty cash requisition. 6. Record the entry to replenish petty cash. 7. Print a General Journal. 8. Complete the Analyze activity. 9. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 22–7 1. Restore the Problem 22-7.QBB file. 2. Record the entry to establish the petty cash fund using the Write Checks option. 3. Record the petty cash vouchers using the Use Register option. 4. Record the entry to replenish the petty cash fund using the Write Checks option. 5. Print a Journal report. 6. Complete the Analyze activity. 7. Back up your work.

662

Date

Feb.

Transactions

2 Prepared Voucher 1 for a $9.25 newspaper advertisement (Advertising Expense). 5 Prepared Voucher 2 for pens and pencils, $5 (Supplies). 9 Paid $12.50 for flowers for an employee’s birthday, Voucher 3 (Miscellaneous Expense). 12 Bought cash register tape for $3.95, Voucher 4 (Supplies). 19 Prepared Voucher 5 for $15 to pay National Express for parts delivered (Delivery Expense). 20 Paid $3.90 for postage stamps, Voucher 6 (Miscellaneous Expense). 22 Paid $16 to have the show window cleaned, Voucher 7 (Miscellaneous Expense). 24 Bought an $11 advertisement in the local newspaper, Voucher 8 (Advertising Expense). 25 Bought stationery for $10, Voucher 9 (Supplies). 26 Prepared Voucher 10 to National Express for packages delivered, $8.25 (Delivery Expense). 27 Prepared Voucher 11 incorrectly and voided it. 27 Purchased memo pads for the office for $3, Voucher 12 (Supplies). 28 Paid the news carrier a $4 tip for the daily newspaper delivery, Voucher 13 (Miscellaneous Expense). CONTINUE

Chapter 22 Problems

640-667_CH22_868829.indd 662

9/21/05 1:40:52 PM

Problems Date

C HAPT E R 22

Transactions (cont.)

28

Paid $6.80 for postage stamps, Voucher 14 (Miscellaneous Expense). 28 Prepared Voucher 15 for a $10 newspaper advertisement (Advertising Expense).

Analyze

Identify the number of payments that were made from the petty cash fund during the month of February.

Problem 22–8 Handling a Petty Cash Fund SMART GUIDE

River’s Edge Canoe & Kayak petty cash fund was established on February 1 for $100, by writing check 1763. The accounts for which petty cash disbursements are likely to be made include Supplies, Gas Expense, Advertising Expense, Delivery Expense, and Miscellaneous Expense.

Step–by–Step Instructions: Problem 22–8

Instructions 1. In your working papers, record the entry to establish the petty cash fund on page 12 of a general journal. 2. Record the establishment of the fund on the first line of the petty cash register, page 1. 3. Record each petty cash disbursement in the petty cash register. 4. Foot, prove, total, and rule the petty cash register on February 28. 5. Reconcile the petty cash fund. The amount in the petty cash box is $1.50. 6. Prepare a petty cash requisition. Sign your name as petty cashier. 7. Record the entry to replenish the petty cash fund by issuing Check 1798 in the general journal, page 15. 8. Record the replenishment information in the petty cash register. 9. The accountant believes the petty cash fund should be increased by $25. Record the issuance of Check 1799 on February 28. Date

Feb.

Transactions

1

Bought an $8 advertisement in the local newspaper, Voucher 101. 2 Prepared Voucher 102 for $7.50 to pay Mercury Messenger for packages delivered. 3 Bought adding machine tape for 75¢, Voucher 103. 5 Paid $9.50 for flowers for an employee’s birthday, Voucher 104. CONTINUE

1. Select the problem set for River’s Edge Canoe & Kayak (Prob. 22–8). 2. Rename the company and set the system date. 3. Record the entry to establish the petty cash fund. 4. Manually record the petty cash disbursements. 5. Reconcile the petty cash register and manually prepare a petty cash requisition. 6. Record the entry to replenish the petty cash fund. 7. Record the entry to increase the petty cash fund. 8. Print a General Journal report and proof your work. 9. Complete the Analyze activity. 10. End the session.

Chapter 22 Problems

640-667_CH22_868829.indd 663

663

9/17/05 1:27:44 PM

Problems

C H A P T ER 2 2 Date

7 9 12 15 18 20 23 23 27 28 28 28

Transactions (cont.)

Prepared Voucher 105 for $5.25 for a typewriter ribbon. Paid $4.40 for postage stamps, Voucher 106. Bought $9 worth of gasoline, Voucher 107. Paid $8.50 to have the shop’s windows washed, Voucher 108. Bought memo pads, pencils, and pens for office use, $6.30, Voucher 109. Prepared Voucher 110 for $7.50 to pay Mercury Messenger for packages delivered. Prepared Voucher 111 incorrectly and voided it. Bought stationery for $8, Voucher 112. Paid the news carrier $4.75 for the daily newspaper, Voucher 113. Prepared Voucher 114 for $7.50 to pay Mercury Messenger for packages delivered. Bought gasoline, $5.80, Voucher 115. Prepared Voucher 116 for a newspaper advertisement, $5.

Analyze

CHALLENGE PROBLEM

List the petty cash disbursements that are charged to the Miscellaneous Expense account.

Problem 22–9 Locating Errors in a Petty Cash Register

On February 1 a petty cash fund of $150 was established for Buzz Newsstand, Check 1198. The petty cashier writes a voucher for each petty cash disbursement. The vouchers are entered in a petty cash register, which is included in your working papers. When the petty cash register was totaled on February 28, the accounting clerk discovered that the footings of the Distribution of Payments columns did not equal the total of the Payments column.

Instructions 1. Compare the petty cash disbursement information in your working papers with the entries in the petty cash register. 2. Correct any errors you find in the petty cash register by drawing a line through the incorrect item and writing the correction above it. 3. Total all columns after the corrections are made. 4. Record the replenishment information on the register. The amount in the petty cash box on February 28 was $8.10.

Analyze

664

Explain how you determined the amount of the check to replenish the petty cash fund on February 28.

Chapter 22 Problems

640-667_CH22_868829.indd 664

4/6/06 6:31:25 PM

Winning Competitive Events

CHAPTER 22

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. An amount of cash kept on hand and used for making small payments is called a. revenue. d. prepaid interest. b. cash. e. none of these answers c. petty cash. 2. A form showing proof of a petty cash payment is a a. check. c. petty cash check stub. b. petty cash slip. d. journal. 3. A petty cash on hand amount that is more than a recorded amount is called c. cash credit. a. cash over. b. cash short. d. cash debit.

Business Professionals of America MULTIPLE CHOICE 4. The entry to replenish the petty cash fund requires Debit Credit a. Petty Cash Fund Cash b. Petty Cash Expense Petty Cash Fund c. Cash Petty Cash Fund d. Various Expense accounts Cash 5. Michelle is a cashier for The Pet Store. When she counted the cash in her register drawer at the end of the day, the total was $959.74. According to the electronic register, she should have had a balance of $969.85. Was Michelle short or over in her drawer and by how much? a. $10.11 short c. $10.38 short b. $10.11 over d. $10.38 over

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 22. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

640-667_CH22_868829.indd 665

Chapter 22 Winning Competitive Events

665

10/20/05 4:46:38 PM

C H A P T ER 2 2 Critical Thinking

Cash Funds

CASE

STUDY

Merchandising Business: Health Foods

ETHICS

Borrowing from Petty Cash

a mattoefr

))

$ )) Communicating ACCOUNTING

666

Real-World Applications and Connections

1. What form is used to control payments from the petty cash fund? 2. What happens to cash in a cash register drawer at the end of a business day? 3. You are the petty cashier responsible for the petty cash fund. You counted the cash in the petty cash box and found that you will likely run out of petty cash soon. What would you do to restore the fund to its original cash balance? 4. How do you find out whether a petty cash fund amount is short or over? 5. Summarize the steps involved in replenishing the petty cash fund. What are the source document(s) for recording the journal entry, and which account(s) is (are) used to make the journal entry? 6. Which problem do you think is more serious in a change fund: cash short or cash over? Why? The Healthy Alternative sells vitamins and natural health-care products. It has two electronic cash registers that track inventory and record sales directly to the computerized accounting system. The store owner is concerned because the actual cash on hand is usually short when it is compared to the sales records. INSTRUCTIONS 1. You work for a local CPA firm that is auditing The Healthy Alternative’s accounting records. What advice would you give the owner about cash controls and protection? 2. Explain to the owner why it is important for the cash records to match the accounting records. You are the petty cashier for a local theater group. Its petty cash fund pays for taxi fares to and from the airport for actors, directors, and set designers. Today you forgot to bring cash for your lunch. You consider borrowing $5 from the petty cash fund and leaving an IOU. After all, you will pay it back tomorrow. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Process to Increase the Change Fund Retro Threads sells designer vintage clothing on consignment. The shop is open only on Fridays and Saturdays and does a brisk business. You maintain the accounting records for the shop. Dorothy Douglas, the owner, wants to increase the change fund from $100 to $200. Write her a note explaining the transaction. Remind her to notify the salesclerks that the change fund will increase by $100.

Chapter 22 Real-World Applications and Connections

640-667_CH22_868829.indd 666

9/17/05 1:27:48 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

C HAPT E R 22

Integrity Fun Farm is a hands-on, educational working farm where elementary students learn about planting crops and raising animals. In auditing its petty cash fund, you notice some unusual disbursements and cash shortages. You suspect an employee is taking funds from it and not preparing a voucher or falsifying one. Discuss with a partner how you should handle this situation.

International Monetary Fund When Kenya suffered a severe drought in 2000, the International Monetary Fund (IMF) helped with a $52 million loan. The IMF helps promote a healthy world economy through exchange rate stability, the growth of international trade, and monitoring economic developments. Its members can get technical advice and training or financial assistance to correct underlying economic problems. INSTRUCTIONS Summarize benefits available to IMF members.

Your Spending Records You should track your cash daily to be aware of the cash you have at the start and end of each day. If the amounts differ, you should have receipts for expenses or estimate where the remainder went such as for cold drinks or snacks. If you cannot account for the difference, you should pay more attention to spending cash. PERSONAL FINANCE ACTIVITY For three days, track your personal expenses like a petty cash fund. Record how much you spend on each item on an envelope or sheet of paper. At the end of each day, is your cash over or short? PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 22.

Calculating Price-Earnings Ratio To decide whether to buy stock, analysts and investors look at stock prices over time and calculate the price-earnings (PE) ratio. It compares a stock’s current market value with its earnings per share. Suppose a company has a PE ratio of 10. At that price, investors are willing to pay $10 for every dollar of last year’s earnings. Companies that are expected to grow will have a higher PE ratio than companies in decline. To calculate the PE ratio: Price-earnings ratio 

Current market value per share Earnings per share

INSTRUCTIONS Use PETsMART’s consolidated statements of operations in Appendix F to answer these questions. Use the “Basic” earnings per share figure, and round your answer to the nearest whole number. 1. For the fiscal year ended February 1, 2004, calculate the PE ratio assuming PETsMART stock is selling at (a) $32.50 per share and (b) $35.00 per share. 2. Describe how stock price affects the PE ratio. How would you use this ratio in deciding which stocks to buy? glencoeaccounting.glencoe.com

640-667_CH22_868829.indd 667

Chapter 22 Real-World Applications and Connections

667

9/17/05 1:27:52 PM

CH A P T ER 2 3

Plant Assets and Depreciation BEFORE YOU

READ

What You’ll Learn

Predict

1.

Identify plant assets.

2.

Explain the need to depreciate plant assets.

3.

Calculate annual depreciation of plant assets.

1. 2. 3. 4.

4.

Calculate partial-year depreciation of plant assets.

5.

Determine the book value of a plant asset.

6.

Record depreciation of plant assets.

7.

Prepare depreciation schedules.

8.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

The matching principle requires expenses to be matched with revenues.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business DEPRECIATING ASSETS

Rush Trucking If you owned a trucking company, would you get up at 3 a.m. to deliver shipments yourself? Andra Rush did when she started Rush Trucking in 1984. She also worked the phones as dispatcher, made sales calls, and repaired trucks. Rush started her company with only three trucks purchased with her savings. “I believed that if we could get the business, we would do a good job and that would lead to repeat business and bigger contracts,” Rush said about her business strategy. Rush Trucking now earns over $125 million annually and operates 2,000 tractors and 3,900 trailers. Companies like Rush Trucking generate revenue with longterm assets. Depreciation allows them to match the cost of assets to revenue over several accounting periods.

What Do You Think? What do you think Rush Trucking considers when it matches truck costs to revenue?

668

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 668

9/16/05 12:31:27 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE All businesses have assets. Some of those assets become less useful because over time they wear out or become obsolete. Examples of these depreciable assets are company trucks and computers. You will learn how to identify depreciable assets, how to set up depreciation schedules, and how to make the adjusting entry for depreciation expense in this chapter.

glencoeaccounting.glencoe.com

668-695_CH23_868829.indd 669

Personal Connection In your workplace are there assets that are wearing out or need to be replaced? What are they?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 23.

669

9/16/05 12:31:33 PM

SECTION 1

BEFORE YOU

READ

Main Idea

A business uses plant assets for more than one accounting period, so it spreads the cost of these assets over a number of years.

Plant Assets and Equipment Businesses own many different types of assets. One category of asset requires special treatment in the accounting records. These assets, such as office equipment and buildings, have two things in common: • •

They are expected to produce benefits for the business for more than one year. They are purchased for use in operating the business, not for resale.

Rush Trucking owns many assets in this category, including computer equipment, office equipment, and trucks. Let’s explore how businesses account for these types of assets.

Read to Learn…

Current and Plant Assets

current assets and plant assets. (p. 670) ➤ four factors used to estimate the depreciation of plant assets. (p. 671)

Throughout this textbook you have learned about various assets that a business uses in its operation. These assets can be classified as current assets or plant assets.

➤ the difference between

How Do You Match the Cost of Assets to the Revenue They Help Generate?

Current Assets

Key Terms

plant assets depreciation disposal value straight-line depreciation

AS YOU

Plant and Current Assets Current assets will be consumed or converted to cash in one accounting period. Plant assets will be used for more than one accounting period.

670

Assets that are either consumed or converted to cash during the normal operating cycle of the business, usually one year. Examples are:

Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Examples are:

• •

• • • • •

READ

Key Point

Plant Assets

•

cash accounts receivable (cash to be collected from customers within a short period of time) merchandise (sold within a short period of time)

land buildings delivery equipment store equipment office equipment

In Chapter 18 you learned about assets such as supplies and prepaid insurance. As these assets are used, their costs are converted to expenses. This conforms to the matching principle of accounting, which states that during an accounting period, expenses must be matched with the revenue earned. Since current assets are consumed within one accounting period, the costs of current assets can be easily matched to the revenue for the period.

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 670

9/16/05 12:32:05 PM

Estimating Depreciation of a Plant Asset

AS YOU

What Four Factors Are Used to Estimate Depreciation? Plant assets are used over a number of accounting periods. To follow the matching principle, the cost of a plant asset is spread over, or allocated to, the periods in which the asset will be used to produce revenue. Allocating, or spreading the cost of a plant asset over that asset’s useful life is called depreciation . For accounting purposes businesses depreciate all plant assets except land. The cost of land is not depreciated because land is considered to have an unlimited useful life. In this chapter you will learn how to calculate and record the depreciation of plant assets. For example, suppose that a plant asset costs $40,000 and has a useful life of 10 years. The cost of the asset is depreciated over 10 years. A portion of the $40,000 is transferred to an expense account each year. At the end of 10 years, the cost of this plant asset will have been recognized as an expense. It is important to remember that depreciation is an estimate. No one can predict with certainty the useful life or the disposal value of an asset. Four factors are used to calculate depreciation of a plant asset: • • • •

READ

Compare and Contrast Current and Plant Assets How are current assets and plant assets similar and different?

its cost its estimated useful life its estimated disposal value the depreciation method used

Plant Asset Cost The cost of a plant asset is the price the business paid to purchase it plus any sales taxes, delivery charges, and installation charges. The total cost is the amount debited to the plant asset account (for example, Delivery Equipment) at the time of purchase.

AS YOU

Estimated Useful Life of a Plant Asset The estimated useful life of a plant asset is the number of years it is expected to be used before it wears out, becomes outdated, or is no longer needed by the business. The number of years a plant asset can be used varies from one asset to another. A delivery truck might have a useful life of six years. A building, on the other hand, might have a useful life of 30 years.

READ

In Your Experience What personal assets do individuals use for more than one year?

Section 1 Plant Assets and Equipment

668-695_CH23_868829.indd 671

671

9/16/05 12:32:08 PM

MATH HINTS Rounding Cents

• Look at the digit to the right of the hundredths digit. • If it is 5 or more, round up. • If it is less than 5, do not change the hundredths digit. Correct: 8.0347
8.03 4 is less than 5 so the hundredths digit does not change. Incorrect: 8.0347
8.035
8.04

In estimating useful life, the accountant considers past experiences with the same type of asset. The Internal Revenue Service (IRS) also publishes guidelines on the estimated useful lives for many types of assets.

Estimated Disposal Value of a Plant Asset At some point a plant asset will be replaced or discarded. Usually this occurs while the asset still has some monetary value. For example, if a business buys a new delivery truck, the old delivery truck can often be traded in to reduce the price of the new truck. The estimated amount that a plant asset will be worth at the time of its replacement is called the disposal value . The disposal value assigned to a plant asset is an estimate that is based on previous experience. The IRS also publishes guidelines on disposal values.

Depreciation Methods Several methods for computing depreciation expense are acceptable. In this course you will learn a simple, widely used depreciation method called the straight-line method. Straight-line depreciation equally distributes the depreciation expense over the asset’s estimated useful life. Other methods of computing depreciation include units-of-production and accelerated methods. • •

Units-of-production method estimates useful life measured in units of use rather than units of time. Accelerated depreciation methods are based on the theory that an asset loses more value in the early years of its useful life than in the later years. Two types of accelerated depreciation are the sum-of-the-years’digits method and the declining-balance method.

Depreciation for Tax Reporting The federal income tax law has rules for depreciating assets. These rules include the accelerated cost recovery system (ACRS). It is called accelerated because it allows the business to recognize depreciation expense over a shorter period of time. The ACRS method does not take disposal value into consideration. Congress modified ACRS in 1986 resulting in MACRS (pronounced makers), the modified accelerated cost recovery system. This system is used for tax accounting purposes only. It is not used for business financial reports. It is intended to be an incentive for businesses to invest in plant assets. The higher depreciation expense results in a lower income tax liability.

672

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 672

9/16/05 12:32:15 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea Use a diagram like this one to show the four factors that are used to calculate a plant asset’s depreciation.

#ALCULATING $EPRECIATION

Do the Math You work for Island Tropics, a trendy clothing store. It recently purchased a computer system for $20,000. The computers have an estimated useful life of five years. The $20,000 cost can be depreciated over the useful life of the asset as an expense on the tax return of the business. What is the amount that can be deducted each year as an expense if the computer’s estimated disposal value is $1,000 and the straight-line depreciation method is used?

Problem 23–1 Classifying Asset Accounts Listed here are the assets of New England Sports Equipment Inc. Accounts Receivable Building Cash in Bank Change Fund Delivery Equipment Land Merchandise Inventory

Office Equipment Office Furniture Petty Cash Fund Prepaid Insurance Store Equipment Supplies

Instructions In your working papers, indicate whether each asset listed is a current asset or a plant asset by placing a check mark in the correct column. The first account is completed as an example. Asset

Current Asset

Accounts Receivable

✔

Plant Asset

Section 1 Plant Assets and Equipment

668-695_CH23_868829.indd 673

673

9/16/05 12:32:19 PM

SECTION 2

BEFORE YOU

READ

Main Idea

Businesses maintain a record of each plant asset and its related depreciation.

Read to Learn… ➤ how to calculate

Calculating Depreciation On Your Mark Athletic Wear purchased a delivery truck on January 5 for $16,500 cash. The truck has an estimated disposal value of $1,500 and an estimated useful life of five years.

Calculating Depreciation How Do You Calculate Plant Asset Depreciation? To calculate depreciation you need to know the cost of the truck, its estimated useful life, and its estimated disposal value. First calculate the amount to be depreciated:

depreciation. (p. 674) ➤ how to determine book value. (p. 675)

Original  Estimated  Amount Cost Disposal Value to Be Depreciated

Key Terms

$16,500 

accumulated depreciation book value

$1,500



$15,000

The estimated disposal value represents the part of the asset’s cost that the business expects to recover. Therefore, the estimated disposal value should not be treated as an expense.

Straight-Line Depreciation Calculate the annual depreciation expense using the straight-line method:

Amount Annual  Estimated  to Be Depreciated Useful Life Depreciation Expense $15,000

5





$3,000

The annual depreciation expense for the delivery truck is $3,000. For straight-line depreciation, the depreciation rate is 1 divided by the years of useful life. In this example the depreciation rate is 20% per year (1
5 years). Note that the $3,000 depreciation expense is for a full year. Suppose that On Your Mark purchased the delivery truck on April 5 instead of January 5. During the first year, the delivery truck will be used for only nine months. Therefore, the depreciation expense is calculated for nine months.

Annual Partial Year
Fraction  Depreciation Expense of Year Depreciation Expense $3,000

674




9/12



$2,250

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 674

9/16/05 12:32:22 PM

Declining-Balance Depreciation With the declining-balance method, the annual depreciation expense is the asset’s book value multiplied by the declining-balance rate. The decliningbalance rate can vary, but it is usually double the straight-line rate. For a five-year asset, the rate is 40% (2  [1
5]). Disposal value is not used in the computation. However, after the last year of depreciation, the total depreciation expense “stops” at the asset’s disposal value. The annual depreciation expense for the truck’s first year is $6,600 ($16,500  40%).

AS YOU

READ

Key Point Original Cost  Accumulated Depreciation Book Value

Plant Asset Records Where Do You Record Plant Asset Values? Businesses maintain records for each plant asset and the depreciation taken for that asset. The record in Figure 23–1 provides detailed information about the delivery truck, including: 1. the date of purchase 2. the original cost 3. the estimated useful life

4. annual depreciation 5. accumulated depreciation 6. book value at the end of each year

The lower part of the plant asset record contains the depreciation schedule. The amount of depreciation expense accumulates from one year to the next. Accumulated depreciation is the total amount of depreciation for a plant asset that has been recorded up to a specific point in time. The accumulated depreciation at the end of the third year is $9,000. The far right column of the depreciation schedule shows the book value of the plant asset, the original cost less accumulated depreciation. At the end of the third year, the book value of the delivery truck is $7,500 ($16,500  $9,000). Note that the delivery truck’s book value at the end of five years is $1,500. This is the truck’s estimated disposal value. Under the straight-line method, it cannot be depreciated below its estimated disposal value.

PLANT ASSET RECORD ITEM

Delivery Truck

SERIAL NUMBER

2911-50041

PURCHASED FROM

ESTIMATED LIFE

MANUFACTURER

Winding Creek Auto

5 years 3

DEPRECIATION METHOD

GENERAL LEDGER ACCOUNT

DEPRECIATION

Straight-line

PER YEAR

VanPower

EST. DISPOSAL VALUE

LOCATION

$3,000.00

Delivery Equipment

$1,500.00

Company Garage

4 5

ASSET DATE

EXPLANATION DEBIT

1

1/5/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012

ACCUMULATED DEPRECIATION

Purchased

16,500 2

CREDIT

BALANCE

DEBIT

CREDIT

BALANCE

BOOK VALUE

6 16,500

16,500 3,000 3,000 3,000 3,000 3,000

3,000 6,000 9,000 12,000 15,000

13,500 10,500 7,500 4,500 1,500

Figure 23–1 Plant Asset Record

Section 2 Calculating Depreciation

668-695_CH23_868829.indd 675

675

9/16/05 12:32:25 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Using a diagram like this one, show the step-by-step procedure to record the first year’s depreciation using the straight-line method.

3TEPSTO2ECORD$EPRECIATION

Do the Math Office furniture for Teen Counseling Center is estimated at a total value of $45,000 with a 10% disposal value. The estimated useful life is four years. Calculate the annual depreciation expense for the office furniture using the straight-line method.

Problem 23–2 Calculating Depreciation Expense Instructions For each of the following plant assets: 1. calculate the amount to be depreciated, 2. calculate the annual depreciation expense using the straight-line method, 3. calculate the depreciation expense for the first year. Use the form provided in your working papers. Months Owned Original Plant Asset First Year Cost 1. 2. 3. 4. 5.

Cash register Computer Conference table Delivery truck Desk

8 2 6 3 11

$

450 6,500 1,900 36,400 3,180

Estimated Disposal Value $

30 1,500 100 6,400 300

Estimated Useful Life 7 years 5 years 25 years 5 years 20 years

Problem 23–3 Completing a Plant Asset Record Use the following information to complete the blank asset record found in your working papers. The company uses the straight-line method for depreciating all plant assets. Item Purchased: Xerox Copier—Serial No. X42599757, $12,500, from K&C Office Equipment. Purchased: 10/1/2011 Estimated Life: 5 years Location: Executive Offices Estimated Disposal Value: $1,700 676

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 676

4/6/06 6:24:36 PM

Accounting for Depreciation Expense at the End of a Year

SECTION 3

After depreciation on plant assets has been calculated, adjustments are made to record depreciation for the period. These adjustments bring the general ledger into agreement with the plant asset records.

Adjusting for Depreciation Expense How Do You Adjust for Depreciation Expense? When a plant asset is purchased, the accountant sets up a depreciation schedule for the asset like the one in Figure 23–1 on page 675. The amount of depreciation expense for each plant asset is recorded in the accounting records at the end of the year. The information to record the adjustments for depreciation comes from the plant asset records. Many businesses prepare a summary of depreciation expense for each type of plant asset. For example, a business may have 10 delivery trucks. Each truck has its own plant asset record. At the end of the year, the depreciation expense for all 10 trucks is totaled. This total is entered on a summary form under the name of the asset account, in this case, Delivery Equipment. Figure 23–2 shows On Your Mark’s depreciation summary form for its plant assets. On Your Mark’s total depreciation expense for the year is $33,000. This amount includes the depreciation expense for all plant assets. The accumulated depreciation for all of On Your Mark’s plant assets is $100,250.

BEFORE YOU

READ

Main Idea

An end-of-period adjusting entry is made for depreciation expense.

Read to Learn… ➤ the accounts used to

record depreciation. (p. 677) ➤ how to journalize adjusting and closing entries for depreciation expense. (p. 681)

Making the Depreciation Expense Adjustment The adjustment for depreciation affects two accounts: Depreciation Expense and Accumulated Depreciation. The Depreciation Expense Account. Depreciation Expense is an expense account. During the year the account has a zero balance because 2008 SUMMARY OF DEPRECIATION EXPENSE December 31, 2008

Asset

Cost

Depreciation Expense

Depreciation to Date

Building

50,000

2,500

8,125

Delivery Equipment

16,500

3,000

9,000

Office Equipment Store Equipment

Totals

50,000

2,500

8,125

250,000

25,000

75,000

366,500

33,000

100,250

Figure 23–2 Depreciation Summary Form

Section 3 Accounting for Depreciation Expense at the End of a Year

668-695_CH23_868829.indd 677

677

9/16/05 12:32:30 PM

AS YOU

READ

Instant Recall Adjusting Entries An adjusting entry affects one permanent account and one temporary account.

the adjustment for depreciation is recorded at the end of the period. Depreciation Expense is reported on the income statement. At the end of the year, Depreciation Expense is closed to Income Summary. Businesses have a depreciation expense account for each type of plant asset. Some examples are: Depreciation Expense—Delivery Equipment (trucks, vans, automobiles) Depreciation Expense—Office Furniture (desks, chairs, filing cabinets)

• •

The Accumulated Depreciation Account. The balance of Accumulated Depreciation represents the total amount of depreciation expensed since the business purchased the asset. Each type of plant asset has an accumulated depreciation account. Typical account names are: • •

Accumulated Depreciation—Delivery Equipment Accumulated Depreciation—Building

Accumulated Depreciation is classified as a contra asset account. Recall that the balance of a contra account reduces the balance of its related account. In the case of an accumulated depreciation account, the related account is a plant asset account. For Accumulated Depreciation example, if the asset account is Delivery Credit Debit Equipment, the contra asset account is   Accumulated Depreciation—Delivery Increase Side Decrease Side Equipment. Normal Balance Side The debit and credit rules for an accumulated depreciation account are opposite those for an asset account. The balance of an accumulated depreciation account is reported on the balance sheet as a decrease to its related plant asset account.

Account Name Asset

Expense

Contra Asset

Del. Equip.

Depr. Exp.—Del. Equip.

Accum. Depr.—Del. Equip.

Office Equip.

Depr. Exp.—Office Equip.

Accum. Depr.—Office Equip.

Store Equip.

Depr. Exp.—Store Equip.

Accum. Depr.—Store Equip.

The Adjustment. Let’s learn how to record depreciation of plant assets. Look at On Your Mark’s depreciation schedule in Figure 23–1 on page 675. The delivery truck annual depreciation expense is $3,000.

Adjustment On December 31 the accounting clerk for On Your Mark records the depreciation for the delivery truck. ANALYSIS

Identify Classify

/

678

1. The accounts affected are Depreciation Expense—Delivery Equipment and Accumulated Depreciation—Delivery Equipment. 2. Depreciation Expense—Delivery Equipment is an expense account. Accumulated Depreciation—Delivery Equipment is a contra asset account. 3. Both Depreciation Expense—Delivery Equipment and Accumulated Depreciation—Delivery Equipment are increased by $3,000.

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 678

9/16/05 12:32:32 PM

DEBIT-CREDIT RULE

4. Increases to expense accounts are recorded as debits. Debit Depreciation Expense—Delivery Equipment for $3,000. 5. Increases to contra asset accounts are recorded as credits. Credit Accumulated Depreciation—Delivery Equipment for $3,000.

T ACCOUNTS

6.

Depreciation Expense— Delivery Equipment Credit 

Debit  3,000

Accumulated Depreciation— Delivery Equipment Credit  3,000

Debit 

Accountants make similar adjustments to record depreciation for other plant assets, such as buildings and office equipment. Analysis of the Accumulated Depreciation Account. Suppose this is the end of the third year of the estimated useful life of On Your Mark’s delivery truck. For each year the same adjustment was made to record the depreciation of the delivery truck: • •

a debit to Depreciation Expense—Delivery Equipment a credit to Accumulated Depreciation—Delivery Equipment

After the books have been closed each year, the Depreciation Expense— Delivery Equipment account has a zero balance. (Remember that expense accounts are closed at the end of each year.) In contrast the Accumulated Depreciation—Delivery Equipment account shows the total amount of depreciation expensed since the asset was purchased. At the end of the third year, the total is $9,000. Accumulated Depreciation— Delivery Equipment Debit 

Credit  3,000 3,000 3,000 Bal. 9,000

(first year depreciation) (second year depreciation) (third year depreciation)

Recording Depreciation Adjustments on a Work Sheet After preparing the adjustment for depreciation, the accountant enters it in the Adjustments section of the work sheet. Refer to Figure 23–3 on pages 680 and 681. Locate the accumulated depreciation accounts in the Trial Balance Credit column ($6,000 and $5,625). Note that the depreciation expense accounts do not have balances in the Trial Balance section. Adjustments (e) and (f) are entered in the Adjustments section to show the depreciation adjustments for the year. Note that the depreciation expense accounts are debited and the accumulated depreciation accounts are credited. Also note that no adjustments are made to the asset accounts.

AS YOU

READ

In Your Own Words Recording Depreciation On December 31 the accounting clerk records the depreciation for a plant asset. What does this mean?

Section 3 Accounting for Depreciation Expense at the End of a Year

668-695_CH23_868829.indd 679

679

9/16/05 12:32:33 PM

On Your Mark Work For the Year Ended TRIAL BALANCE

ACCT. NO.

8 9 10 11

Figure 23–3 Work Sheet with Depreciation Adjustments

23 24

140 142 145 147

ACCOUNT NAME

Delivery Equipment Accum. Depr.—Delivery Equip. Office Equipment Accum. Depr.—Office Equipment

DEBIT

ADJUSTMENTS

CREDIT

CREDIT

DEBIT

16 5 0 0 00 6 0 0 0 00

(e)

3 0 0 0 00

5 6 2 5 00

(f )

2 5 0 0 00

50 0 0 0 00

(e)

615 Depr. Expense—Delivery Equip. 620 Depr. Expense—Office Equip.

(f )

3 0 0 0 00 2 5 0 0 00

25

Each amount is extended to the other work sheet columns. Column Extended to Account Adjusted Trial Balance Financial Statement Del. Equip. Debit (unchanged) Balance Sheet Accum. Depr.—Del. Equip. Credit (increased) Balance Sheet Office Equip. Debit (unchanged) Balance Sheet Accum. Depr.—Office Equip. Credit (increased) Balance Sheet Depr. Exp.—Del. Equip. Debit (increased) Income Statement Depr. Exp.—Office Equip. Debit (increased) Income Statement

Reporting Depreciation Expense and Accumulated Depreciation on Financial Statements Figure 23–4 shows placement of the depreciation expense accounts on the partial income statement of On Your Mark. On Your Mark Athletic Wear Income Statement For the Year Ended December 31, 20--

Operating Expenses Depreciation Expense—Delivery Equip. Depreciation Expense—Office Equip. Total Operating Expenses Operating Income

Figure 23–4 Income Statement

680

3 0 0 0 00 2 5 0 0 00 94 3 5 1 00 51 3 4 2 00

Figure 23–5 shows placement of the plant asset and related accumulated depreciation accounts. Both types of accounts appear in the Assets section of the balance sheet. Notice that the accumulated depreciation account is listed immediately below the related plant asset account.

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 680

9/16/05 12:32:34 PM

Athletic Wear Sheet December 31, 20-ADJUSTED TRIAL BALANCE DEBIT

CREDIT

INCOME STATEMENT DEBIT

16 5 0 0 00

CREDIT

BALANCE SHEET CREDIT

DEBIT

16 5 0 0 00 9 0 0 0 00

8

9 0 0 0 00

50 0 0 0 00

50 0 0 0 00 8 1 2 5 00

3 0 0 0 00 2 5 0 0 00

8 1 2 5 00 3 0 0 0 00 2 5 0 0 00

9 10 11

23 24 25

Figure 23–3 Work Sheet with Depreciation Adjustments (continued)

For Delivery Equipment: • • •

The original cost is entered in the first amount column on the first line ($16,500). The accumulated depreciation is entered in the first amount column on the second line ($9,000). The difference between cost and accumulated depreciation is entered in the second amount column on the second line ($7,500).

The book value of the delivery equipment is $7,500. The book value of each plant asset reported on the balance sheet should be the same as that shown on the plant asset record. On Your Mark Athletic Wear Balance Sheet December 31, 20-Assets Delivery Equipment Less: Accum. Depr.—Delivery Equip. Office Equipment Less: Accum. Depr.—Office Equip.

16 9 50 8

500 000 000 125

00 00 7 5 0 0 00 00 00 41 8 7 5 00

Figure 23–5 Balance Sheet

Adjusting and Closing Entries for Depreciation Expense What Are the Adjusting and Closing Entries for Depreciation? After the accountant has completed the work sheet and prepared the financial statements, the adjustments for depreciation expense are recorded in the general journal. The information for the journal entries is taken directly from the Adjustments section of the work sheet.

Section 3 Accounting for Depreciation Expense at the End of a Year

668-695_CH23_868829.indd 681

681

9/16/05 12:32:34 PM

Adjustment Record the December 31 adjusting journal entries for depreciation. ANALYSIS

Identify

Classify

/

1. The accounts affected are Depreciation Expense—Delivery Equipment, Depreciation Expense—Office Equipment, Accumulated Depreciation—Delivery Equipment, and Accumulated Depreciation— Office Equipment. 2. Depreciation Expense—Delivery Equipment and Depreciation Expense—Office Equipment are expense accounts. Accumulated Depreciation—Delivery Equipment and Accumulated Depreciation— Office Equipment are contra asset accounts. 3. Depreciation Expense—Delivery Equipment is increased by $3,000. Depreciation Expense—Office Equipment is increased by $2,500. Accumulated Depreciation—Delivery Equipment is increased by $3,000. Accumulated Depreciation—Office Equipment is increased by $2,500.

DEBIT-CREDIT RULE

4. Increases in expense accounts are recorded as debits. Debit Depreciation Expense—Delivery Equipment for $3,000 and Depreciation Expense—Office Equipment for $2,500. 5. Increases in contra asset accounts are recorded as credits. Credit Accumulated Depreciation—Delivery Equipment for $3,000 and Accumulated Depreciation—Office Equipment for $2,500.

T ACCOUNTS

6.

Depreciation Expense— Delivery Equipment Debit  3,000

Credit 

Depreciation Expense— Office Equipment Debit  2,500

JOURNAL ENTRY

7.

Credit  3,000

Debit 

Accumulated Depreciation— Office Equipment Credit  2,500

Debit 

GENERAL JOURNAL DATE 1 2 3 4 5

DESCRIPTION

20-Dec. 31 Depr. Exp.—Del. Equip. Accum. Depr.—Del. Equip. 31 Depr. Exp.—Office Equip. Accum. Depr.—Office Equip.

6

682

Credit 

Accumulated Depreciation— Delivery Equipment

POST. REF.

PAGE DEBIT

21

CREDIT 1

3 0 0 0 00

2

3 0 0 0 00 2 5 0 0 00

3 4

2 5 0 0 00

5 6

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 682

9/16/05 12:32:35 PM

After adjusting entries have been journalized and posted, the next step in the accounting cycle is to close the ledger. In the second closing entry, you’ll remember, accounts with debit balances in the Income Statement Debit column of the work sheet are closed to Income Summary. This closing entry includes the depreciation expense accounts. After this closing entry has been posted to the general ledger, the balances of the depreciation expense accounts are reduced to zero.

ON YOUR MARK

Closing

ATHLETIC WEAR

Second Closing Entry—Depreciation accounts only. ANALYSIS

Identify Classify

/

595 Leslie Street, Dallas, TX 75207

1. The accounts affected are Depreciation Expense—Delivery Equipment, Depreciation Expense—Office Equipment, and Income Summary. 2. Depreciation Expense—Delivery Equipment and Depreciation Expense—Office Equipment are expense accounts. Income Summary is a temporary capital account. 3. Depreciation Expense—Delivery Equipment is decreased by $3,000 and Depreciation Expense—Office Equipment is decreased by $2,500; the total decrease is $5,500. The $5,500 is transferred to the Income Summary account.

DEBIT-CREDIT RULE

4. To transfer the expenses to the Income Summary account, debit Income Summary for $5,500. 5. Decreases in expense accounts are recorded as credits. Credit Depreciation Expense—Delivery Equipment for $3,000 and Depreciation Expense—Office Equipment for $2,500.

T ACCOUNTS

6.

Depreciation Expense— Delivery Equipment

Income Summary Debit

Credit

5,500

Credit  Clos. 3,000

Debit  3,000

Depreciation Expense— Office Equipment Credit  Clos. 2,500

Debit  2,500

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

20-Dec. 31 Income Summary Depr. Exp.—Del. Equip. Depr. Exp.—Office Equip.

POST. REF.

PAGE DEBIT

22

CREDIT 1

5 5 0 0 00

2

3 0 0 0 00 2 5 0 0 00

5

Section 3 Accounting for Depreciation Expense at the End of a Year

668-695_CH23_868829.indd 683

3 4 5

683

9/16/05 12:32:37 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a diagram like this one to show the last five steps of the accounting cycle as they relate to depreciation.

3TEP.UMBER

(OW4HIS3TEP2ELATESTO$EPRECIATION

%ND OF 0ERIOD !CCOUNTING #YCLE3TEPS

Do the Math You are preparing a depreciation schedule for a new piece of equipment you purchased for your business, Supreme T-Shirt Outfitters, for $5,000. It has a five-year estimated useful life and a $500 estimated disposal value. Calculate its annual depreciation using the straightline method. Next calculate the accumulated depreciation and the equipment’s book value at the end of each of the five years. Use a table like this one. Add rows for years 2 through 5. %NDOF

0URCHASE0RICE

ST9EAR

 

$EPRECIATION%XPENSE

!CCUMULATED$EPRECIATION

"OOK6ALUE

Problem 23–4 Analyzing a Source Document Instructions In your working papers:

All Purpose Office Equipment

INVOICE NO. 14492

1. Record the purchase in the general 996 Lake Drive, Sacramento, CA 94203 DATE: June 4, 20-ORDER NO.: 22688 journal, page 4. Universal Auto Supply SHIPPED BY: UPS 2. Record the partial depreciation TO 1422 Central Blvd. TERMS: Cash Sacramento, CA 94203 expense for the first year in the QTY. ITEM TOTAL UNIT PRICE general journal, page 7. Xerox Copy Machine $ 3,200.00 $ 3,200.00 1 Serial Number 24X612987 a. Disposal value—$200 256.00 Sales Tax b. Estimated useful life—5 years $ 3,456.00 Total c. Fiscal year end—December 31. d. Method—straight-line 3. Record the annual depreciation, one year later, in the general journal, page 13.

Problem 23–5 Preparing a Depreciation Schedule and Journalizing the Depreciation Adjusting Entry Quade Corporation bought a copy machine on January 7 of the current year for $2,360. It has an estimated useful life of five years and an estimated disposal value of $100.

Instructions In your working papers: 1. Prepare a depreciation schedule for the copy machine using the straight-line method of depreciation. (Use the form provided in your working papers.) 2. Journalize the adjustment for the copy machine’s depreciation at the end of the first year. 3. Journalize the closing entry for the expense account affected by the adjusting entry. 4. What is the book value of the asset after five years? Is this the same as the disposal value? 684

Chapter 23 Plant Assets and Depreciation

668-695_CH23_868829.indd 684

9/16/05 12:32:38 PM

Accounting Careers in Focus U.S. OPERATIONS CONTROLLER

Viasystems, Mishawaka, Indiana Brenda Engel

.. Tips from .

Q: What does Viasystems do? A: We provide firms in a variety of industries with components for their manufacturing processes.

Q: How did you get into accounting? A: I became interested in accounting at a young age when my mom let me help her with the bookkeeping for the family business.

Q: What is most challenging about your job? A: Managing my time and attending to a variety of tasks. I’m responsible for overseeing the company’s assets, as well as advising and training others in accounting software systems and overall business philosophy.

age your Learn to man ch ing ahead. Ea time by plann a quick “to morning, draft r cludes all you do” list that in s. g-term project short- and lon u yo p t will hel This documen resources determine the allow you to you need and r tasks. prioritize you

Q: What skills are needed for your job? A: Strong analytical skills and patience are critical. It’s equally important to have good communication and people skills. Being able to apply what you’ve learned in school to a work setting is also vital if you want to succeed in your job.

Q: What advice do you have for accounting students just beginning their careers? A: Work in as many different settings and with as many different people as possible while you’re in high school and college. You’ll not only gain experience in different areas, but also meet other professionals who can guide you on an appropriate and exciting career path. In addition, make sure you learn and master software such as Microsoft Office. Computer skills are indispensable.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Prepare and consolidate financial statements; manage all aspects of the general ledger; in some cases, supervise the accounts receivable, accounts payable, and general accounting departments. Training or Education Needed: A bachelor’s degree in accounting or finance; a master’s degree in business administration; CPA or CMA designation is preferred; at least five years of experience. Aptitudes, Abilities, and Skills: Strong analytical skills, technology skills, communication skills, and organizational skills. Salary Range: $45,000 to $115,000 depending on location, level of responsibility, and company revenues. Career Path: Start by working for a small company to learn a variety of skills, then gradually move into a management position.

Thinking Critically

Why is it important for accounting professionals to have strong communication skills? Chapter 23 Accounting Careers in Focus

668-695_CH23_868829.indd 685

685

9/16/05 12:32:41 PM

Summary

CH A P T ER 2 3 Key Concepts

1. The assets of a business can be classified as current assets or plant assets. Recall that current assets are either consumed or converted to cash during the normal operating cycle, usually one year. Examples are • cash • merchandise that will be sold shortly • supplies such as paper, pencils, and printer toner Plant assets are long-lived assets used in the production or sale of other assets or services over several accounting periods. Examples are • • • • • • • •

computers copiers cash registers manufacturing equipment office furniture telephone systems vehicles used in the business the buildings that house the business

2. A plant asset is depreciated so that its cost is spread over its useful life. This spreads the cost over the periods that the asset will be used to generate revenue. This allows the business to conform to the matching principle of accounting, which requires that expenses be matched with the revenues the expenses helped to earn. Four factors used to calculate the depreciation of an asset are • • • •

its cost its estimated useful life its estimated disposal value the depreciation method used

The estimated useful life of a plant asset is the number of years it is expected to be used before it wears out. Depreciation is an estimate because no one can be certain how long an asset will last. 3. To match the cost of an asset with the revenue it is used to generate during a year, annual straight-line depreciation is calculated:

Original Cost



Amount to  Be Depreciated

686

Estimated  Disposal Value

Estimated Useful Life



Amount to Be Depreciated

Annual Depreciation Expense

Chapter 23 Summary

668-695_CH23_868829.indd 686

9/16/05 12:32:44 PM

Summary

C HAPT E R 23

4. To calculate depreciation for part of a year:

Annual Partial Year
Fraction  Depreciation Expense of Year Depreciation Expense 5. An asset’s book value is its original cost less its accumulated depreciation. To calculate book value:

Original Cost  Accumulated  Book Value Depreciation

6. To record depreciation: Depreciation Expense— Description of Asset Debit  xx

Credit 

Accumulated Depreciation— Description of Asset Debit 

Credit  xx

7. When a business purchases a plant asset, it sets up a depreciation schedule for the asset. The amount of depreciation expense for each plant asset is recorded at the end of the year. The schedule typically has a column for each of the following: • • • • •

the date the asset’s cost annual depreciation expense accumulated depreciation book value at the end of each year

Key Terms accumulated depreciation

(p. 675)

book value

(p. 675)

depreciation

(p. 671)

disposal value

(p. 672)

plant assets

(p. 670)

straight-line depreciation

(p. 672)

Chapter 23 Summary

668-695_CH23_868829.indd 687

687

9/16/05 12:32:46 PM

C H A P T ER 2 3 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

Plant Assets a. Explain the meaning of the term plant asset. b. Give four examples of plant assets. Plant Asset Depreciation a. Depreciation is an application of what accounting principle? b. What distinguishes a plant asset from a current asset? Annual Depreciation a. What four factors affect the depreciation calculation? b. How is the annual depreciation expense for a plant asset calculated under the straight-line method? Partial-Year Depreciation a. Explain how depreciation for part of a year is calculated. b. What is meant by “allocating the cost” of a plant asset? Book Value of Plant Assets a. What is accumulated depreciation? b. How is book value calculated? Record Depreciation a. What is the classification of the Accumulated Depreciation account? b. Which two accounts are affected by an adjusting entry for depreciation? Prepare Depreciation Schedule a. What is the purpose of a depreciation schedule? b. When is the depreciation of a plant asset recorded?

Apply Key Terms You have just been hired as the plant accountant for Fast Runner, a large manufacturer of inline skates and skateboards. To do your job well, you must be able to understand and apply accounting procedures for plant assets and depreciation. Your immediate boss is the CEO for Fast Runner, Rob Myers. Rob wants you to define the following terms and give him some examples related to Fast Runner. Pair up with a colleague to discuss each term and find an example. Then write your ideas on a note pad for quick reference during your meeting with Rob. Good luck! accumulated depreciation book value

688

depreciation disposal value plant assets

straight-line depreciation

Chapter 23 Review and Activities

668-695_CH23_868829.indd 688

4/6/06 6:24:51 PM

Computerized Accounting C HAPT E R 23 Recording Depreciation Making the Transition from a Manual to a Computerized System Task Recording depreciation

Manual Methods • Estimated annual depreciation is calculated when a fixed asset is purchased. • Each accounting period, an adjusting entry is journalized and posted for each plant asset account in the general ledger. • Recording depreciation affects two accounts, Accumulated Depreciation and Depreciation Expense. • The Depreciation Expense account is closed at the end of the fiscal year.

Computerized Methods • Estimated annual depreciation is calculated when a fixed asset is purchased. • A depreciation journal entry is recorded for the month’s amount. The journal entry can be automatically posted each month as a recurring entry. • Amounts are posted to the Depreciation Expense and Accumulated Depreciation accounts. Their balances are automatically updated.

Q&A Peachtree Question How do I record depreciation for fixed assets in Peachtree?

Answer 1. 2. 3. 4.

From the Tasks menu, select General Journal Entry. Enter the transaction to record the depreciation expense for the current period. Select the Recur icon. Select the number of times and how often you want this transaction to recur. (Each month? Each quarter? Each year?) 5. Click OK.

QuickBooks Q & A QuickBooks Question

Answer

How do I record depreciation for fixed assets in QuickBooks?

1. From the Company menu, select Make General Journal Entries. 2. Enter the transaction to record the depreciation expense for the current period. 3. Memorize the recurring entry using Memorize General Journal from the Edit menu. 4. Set the number of times you want the entry to occur and click OK. 5. Click Save & Close.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 23 Computerized Accounting

668-695_CH23_868829.indd 689

689

9/16/05 12:32:57 PM

Problems

C H A P T ER 2 3 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 23–7 1. Select the problem set for InBeat CD Shop (Prob. 23–7). 2. Rename the company and set the system date. 3. Record the depreciation adjusting entries. 4. Print a General Journal report and proof your work. 5. Complete the Analyze activity. 6. End the session.

TIP: Use the General Journal Entry option to record adjusting entries.

SMART GUIDE Step–by–Step Instructions: Problem 23–8 1. Select the problem set for Shutterbug Cameras (Prob. 23–8). 2. Rename the company and set the system date. 3. Record the adjustments for depreciation using the General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Print an Income Statement, a Statement of Retained Earnings, and a Balance Sheet. 6. Complete the Analyze activity. 7. End the session.

690

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 23–6 Opening a Plant Asset Record On July 10 Sunset Surfwear purchased a scanner from Taunton Equipment for $1,500. Taunton Equipment charged Sunset Surfwear $200 to install the scanner. The scanner has an estimated useful life of four years and an estimated disposal value of $260.

Instructions Prepare a plant asset record, including the depreciation schedule for the new scanner. Use the form provided in your working papers. Serial number: TMC46312 General ledger account: Office Equipment Location: Main Street store Depreciation method: Straight-line Manufacturer: Brothers Company

Analyze

Describe how you determined the book value at the end of each period.

Problem 23–7 Recording Adjusting Entries for Depreciation The following adjustments for depreciation were entered on the work sheet for InBeat CD Shop for the year ended December 31. Adjustments Debit Credit Store Equipment Accumulated Depreciation—Store Equipment Office Equipment Accumulated Depreciation—Office Equipment Depreciation Expense—Store Equipment (e) 3,800 Depreciation Expense—Office Equipment (f) 1,400

(e) 3,800 (f) 1,400

Instructions Record the adjusting entries on general journal page 11.

Analyze

Explain how the adjustment affects the book value of the store equipment.

Chapter 23 Problems

668-695_CH23_868829.indd 690

9/16/05 12:32:59 PM

Problems Problem 23–8 Reporting Depreciation Expense on the Work Sheet and Financial Statements The trial balance of Shutterbug Cameras appears on the work sheet included in your working papers. All adjustments, except those for depreciation, are already recorded on the work sheet.

Instructions 1. Record the following adjustments for depreciation expense on the work sheet. a. Depreciation for office equipment is $2,500. b. Depreciation for store equipment is $1,200. 2. Complete the work sheet. 3. Prepare an income statement, statement of retained earnings, and balance sheet for Shutterbug Cameras for the year ended December 31.

Analyze

C HAPT E R 23 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 23–8 1. Restore the Problem 23-8.QBB file. 2. Record the adjustments for depreciation using the Make General Journal Entries option. 3. Print a Journal report and proof your work. 4. Print a Profit & Loss report and Balance Sheet. 5. Complete the Analyze activity. 6. Back up your work.

Calculate the total current assets.

SMART GUIDE

Problem 23–9 Calculating and Recording Depreciation Expense Cycle Tech Bicycles purchased manufacturing equipment on August 1 for $410,000. The equipment has an estimated useful life of 25 years and an estimated disposal value of $20,000. Cycle Tech uses the straight-line method of depreciation. The partial depreciation schedule found in your working papers is set up for the equipment.

Instructions 1. Calculate annual depreciation, accumulated depreciation, and book value for each of the first two years. The fiscal year ends December 31. Use the form provided in your working papers. 2. Calculate the depreciation adjustment to be entered on the work sheet at the end of the first year. Use T accounts to show the accounts debited and credited. 3. Journalize the adjustment for depreciation at the end of the first year, general journal page 21.

Analyze

Step–by–Step Instructions: Problem 23–9 1. Select the problem set for Cycle Tech Bicycles (Prob. 23–9). 2. Rename the company and set the system date. 3. Calculate the depreciation for the first two years. 4. Record the depreciation adjustment for the first year using the General Journal Entry option. 5. Print a General Journal report and a General Ledger report for the manufacturing equipment accounts and proof your work. 6. Complete the Analyze activity. 7. End the session.

Determine the balance of the accumulated depreciation account at the end of the first and second years.

Chapter 23 Problems

668-695_CH23_868829.indd 691

691

4/6/06 6:25:03 PM

Problems

C H A P T ER 2 3

Problem 23–10 Calculating and Recording Adjustments SMART GUIDE Step–by–Step Instructions: Problem 23–10 1. Select the problem set for River’s Edge Canoe & Kayak (Prob. 23–10). 2. Rename the company and set the system date. 3. Calculate and record the end-of-period adjustments. 4. Print a General Journal report and proof your work. 5. Print an Income Statement and a Balance Sheet. 6. Close the fiscal year. 7. Print a Post-Closing Trial Balance. 8. Complete the Analyze activity. 9. End the session.

QuickBooks

The December 31 trial balance of Rivers Edge Canoe & Kayak is included in your working papers.

Instructions 1. Calculate and record end-of-period adjustments on the work sheet. a. Ending Merchandise Inventory is $15,000. b. Supplies on hand total $1,450. c. The amount of the expired insurance premium is $5,000. d. Use the following information to calculate the estimated annual depreciation expense using the straight-line method. Estimated Estimated Plant Asset Cost Disposal Value Useful Life Store Equipment $ 13,000 $ 1,000 10 years Delivery Truck 32,000 2,000 10 years Building 160,000 10,000 25 years e. The total federal income tax expense for the year is $4,250. 2. Complete the work sheet. 3. Journalize and post the adjusting entries on page 16 of the general journal. 4. Journalize and post the closing entries on page 16 of the general journal.

Analyze

Calculate the total depreciation expense for the year.

PROBLEM GUIDE Step–by–Step Instructions: Problem 23–10 1. Restore the Problem 23-10.QBB file. 2. Calculate and record the end-of-period adjustments. 3. Print a Journal report and proof your work. 4. Print a Profit & Loss report and Balance Sheet. 5. Enter the closing entries and print a Journal report. 6. Print a Post-Closing Trial Balance. 7. Complete the Analyze activity.

CHALLENGE PROBLEM

On May 2 Buzz Newsstand purchased a new machine for $2,700. It has an estimated disposal value of $100 and an estimated useful life of eight years. Buzz uses the straight-line method. On December 31 the adjustment for depreciation for the first year was entered: Accumulated Depreciation—Store Equipment was credited for $325, and Depreciation Expense—Store Equipment was debited for $325.

Instructions Answer the following questions regarding this adjustment: 1. What is wrong with the adjustment for depreciation made on December 31? What is the correct entry? 2. One year from now, another adjustment for this machine will be entered on the work sheet. Assume the error from the previous year is not corrected. What amount should be entered in the Adjustments section for annual depreciation expense?

Analyze

692

Problem 23–11 Examining Depreciation Adjustments

Determine whether the current period net income will be too high or too low if the original error is not corrected.

Chapter 23 Problems

668-695_CH23_868829.indd 692

4/6/06 6:25:04 PM

Winning Competitive Events

C HAPTER 23

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. A truck used in daily operations of a corporation would be considered a(n) a. long-term asset. d. either A or B. b. plant asset. e. none of these answers c. intangible asset. 2. A method that allocates an equal portion of the total depreciation for a plant asset (cost minus salvage) to each accounting period in its service life is a. accelerated depreciation. d. sum-of-the-years’-digits depreciation. b. units-of-production. e. declining-balance depreciation. c. straight-line depreciation. 3. The Crimson Cartage Company purchased a new truck at a cost of $42,000 on July 1. The truck is estimated to have a useful life of 6 years and a salvage value of $6,000. Using the straight-line method, how much depreciation expense will be recorded for the truck during the first year ended December 31? d. $6,000 a. $3,000 b. $3,500 e. $7,000 c. $4,000 4. The adjusting entry for the depreciation of a plant asset such as equipment involves a credit to a. equipment expense. c. depreciation expense. b. accumulated equipment. d. accumulated depreciation.

Business Professionals of America MULTIPLE CHOICE 5. The entry to record depreciation for the fax machine at the end of the fiscal period a. Debit Accumulated Depreciation—Maintenance Equipment, credit Depreciation Expense—Maintenance Equipment b. Debit Depreciation Expense—Maintenance Equipment, credit Accumulated Depreciation—Maintenance Equipment c. Debit Accumulated Depreciation—Office Equipment, credit Depreciation Expense—Office Equipment Need More Help? d. Debit Depreciation Expense— Go to glencoeaccounting.glencoe.com and Office Equipment, credit click on Student Center. Click on Winning Accumulated Depreciation— Competitive Events and select Chapter 23. Office Equipment • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

668-695_CH23_868829.indd 693

Chapter 23 Winning Competitive Events

693

10/13/05 11:55:39 PM

C H A P T ER 2 3 Critical Thinking

Plant Assets

CASE

Merchandising Business: Photography Studio

a mattoefr

STUDY

ETHICS

))

$ )) Communicating ACCOUNTING

Skills Beyond

NUMBERS

694

Real-World Applications and Connections

1. Name several plant assets that a business might use to sell merchandise. 2. Explain how current assets and plant assets differ. 3. A company purchased plant assets for $100,000. It expects to sell them in 4 years for 20 percent of the cost. What is the depreciation expense? 4. Classify these assets: land, building, cash, accounts receivable, computer equipment, merchandise inventory, supplies, and prepaid insurance into (a) plant assets or (b) current assets. Identify the assets to be depreciated. 5. Set up the formulas for calculating the amount to be depreciated, the annual depreciation expense, the accumulated depreciation, and book value. 6. Justify crediting the Accumulated Depreciation account rather than the Plant Asset account when recording depreciation expense. Karina Ludmiko is turning her photography hobby into a business called The Photo Studio. She asked you to set up the company’s asset records. INSTRUCTIONS 1. Assume that The Photo Studio’s photography equipment cost $25,000, has a 10-year useful life, and no salvage value. Set up a depreciation schedule. 2. Explain to Karina how depreciation appears on the financial statements.

Whom Will They Believe? After working for a year as payroll clerk for a small publishing company, you believe you have evidence of embezzlement—and suspect the department manager or senior accountant. Whom can you tell? Who would believe you? ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Promoting Technology As accountant for Playtime Preschool, you want to convince the owner to purchase computers for the children to use. Explain that the company can depreciate the $10,000 investment and deduct the depreciation on its tax return. With a classmate, brainstorm the four factors affecting the depreciation estimate. List your recommendations and practice presenting them to the owner.

Acquiring and Evaluating Information As Westside Wholesale’s newly hired manager, you plan for and control its plant assets. One standard you will be measured by is your budget and the controls you use to stay within that budget. Describe the information you will need to prepare a budget for equipment purchases and maintenance. List internal control procedures to help prevent asset loss and theft. Explain how the budget can be used to evaluate your performance.

Chapter 23 Real-World Applications and Connections

668-695_CH23_868829.indd 694

9/16/05 12:33:05 PM

Real-World Applications and Connections INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Plant Assets Global companies may use the revaluation model allowed by International Accounting Standard 16 to record plant assets. After initially recording an asset at cost, this model revalues an asset at its fair market value less subsequent depreciation, if fair market value can be measured reliably. INSTRUCTIONS Define fair market value. How would revaluation affect the income statement?

Your Vehicle A vehicle is a valuable asset. The vehicle declines in value each year, but if you keep it properly maintained, it will have a higher resale value when you sell it. PERSONAL FINANCE ACTIVITY Determine the book value of your vehicle. It cost $20,000. Its value declined $6,000 in the first year, $4,000 in the second year, and $2,500 in the third year. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 23.

Vertical Analysis Vertical analysis makes it easy to compare financial statements with industry standards, which are average percentages for companies in the same industry. Assume these partial vertical analyses of an income statement and balance sheet are for the pet food and pet supply industry.

Net sales Cost of sales Gross profit

Income Statement Vertical Analysis 100.0% 68.9 31.1%

Current assets Property & equipment All other assets Total assets

Balance Sheet Vertical Analysis 34.3% 49.3 16.4 100.0%

INSTRUCTIONS Use PETsMART’s financial statements in Appendix F for these tasks. 1. Complete a vertical analysis of PETsMART’s cost of sales and gross profit for the year ended February 1, 2004. Compare them to the industry standards above. 2. Complete a vertical analysis of PETsMART’s assets using the classifications above, as of February 1, 2004. Compare PETsMART’s asset mix with the industry standard.

glencoeaccounting.glencoe.com

668-695_CH23_868829.indd 695

C HAPT E R 23

Depreciation Proper procedures can save time in calculating depreciation. Visit glencoeaccounting .glencoe.com and click on Student Center. Click on WebQuest and select Unit 5 to continue your Internet project.

Chapter 23 Real-World Applications and Connections

695

9/16/05 12:33:08 PM

CH A P T ER 2 4

Uncollectible Accounts Receivable BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain methods used to write off uncollectible accounts.

2.

Determine uncollectible accounts receivable.

1. 2. 3. 4.

3.

Use the direct write-off method for uncollectible accounts.

4.

Calculate bad debts expense.

5.

Make an adjusting entry for uncollectible accounts.

6.

Use the allowance method to record uncollectible accounts.

7.

Record the collection of an account previously written off.

8.

Describe two methods to estimate uncollectible accounts expense.

9.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ANALYZING CREDIT LOSSES

U.S. Government Accountability Office Do you ever wonder who keeps watch on how your federal tax dollars are spent? The Government Accountability Office (GAO) has you covered. Independent and nonpartisan, the GAO recommends ways for government agencies to be more effective, audits federal expenditures, investigates fraudulent activities, and issues legal opinions. You may hear news reports about budget deficits or social

Define the accounting terms introduced in this chapter.

security shortfalls. Many Americans are worried about funding

Why It’s Important

farmers can secure government loans but may fail to repay

▲

When a business extends credit, it assumes the risk of uncollectible accounts.

homeland security and health care. Business owners and them due to bad economic times. Elected officials express concern that the government is not collecting its outstanding loans and debts. In light of all these issues, the watchdog GAO is clearly the taxpayer’s best friend.

What Do You Think? Why is it important for the federal government to have good collection policies for the money it is owed?

696

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 696

9/15/05 1:40:03 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE When people cannot pay their debts, businesses must decide what to do about these losses. Retailers and banks are examples of businesses that are likely to have customers who fail to pay what they owe. When a business cannot collect the amounts it is owed, it records them in the accounting records. In this chapter you will learn how to estimate and record uncollectible amounts.

glencoeaccounting.glencoe.com

696-725_CH24_868829.indd 697

Personal Connection 1. Does your workplace have customers who fail to pay what they owe? 2. How does the business handle amounts it cannot collect?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 24.

697

9/15/05 1:40:09 PM

SECTION 1

BEFORE YOU

READ

Main Idea

A business using the direct write-off method converts an account receivable to an expense when it becomes clear the customer will not pay the bill.

Read to Learn… ➤ how and why businesses

extend credit. (p. 698) ➤ how to write off an

uncollectible account using the direct method. (p. 698)

Key Terms

uncollectible account direct write-off method

The Direct Write-Off Method In previous chapters you learned that many businesses sell goods or services on account. Some charge customers cannot or will not pay the amounts they owe.

Extending Credit Why Do Businesses Extend Credit? Selling goods and services on credit is a standard practice for businesses of all sizes and types. They offer credit because they expect to sell more than they would by accepting only cash. Retail stores typically ask customers seeking to purchase on account to complete a credit application. Before a business extends credit, it should check each prospective customer’s credit rating to help determine the customer’s ability to pay the amounts charged on account. Businesses get these credit ratings from the national consumer-credit-reporting companies Equifax, Experian, and TransUnion. Wholesalers and manufacturers use reports from wholesale credit bureaus and national creditrating organizations such as Dun & Bradstreet. An uncollectible account , or bad debt, is an account receivable that the business cannot collect. The business eventually removes the account receivable from its records, and the amount becomes an expense to the business. Businesses account for bad debts by using the direct write-off method or the allowance method.

The Direct Write-Off Method What Is the Direct Write-Off Method?

AS YOU

READ

Key Point Uncollectible Accounts Writing off an uncollectible account converts an asset to an expense.

698

The direct write-off method is used primarily by small businesses and those with few charge customers. Under the direct write-off method , when the business determines that the amount owed is not going to be paid, the uncollectible account is removed from the accounting records. Uncollectible Accounts Expense is debited and Accounts Receivable (both controlling and subsidiary) is credited. The direct write-off method is the only method a business can use for income tax purposes.

Writing Off an Uncollectible Account On June 4 On Your Mark Athletic Wear sold football equipment on account to Robert Galvin for $250 plus $15 sales tax. It recorded the transaction as a $265 debit to Accounts Receivable (controlling) and the subsidiary account Accounts Receivable—Robert Galvin and as a credit to Sales for $250 and Sales Tax Payable for $15.

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 698

9/15/05 1:40:42 PM

For over a year, On Your Mark tried to collect this account. The length of time is one consideration used to determine uncollectible accounts receivable. It is now apparent that Robert Galvin is not going to pay the $265. In effect, a business must decrease total assets and increase total expenses when a customer fails to pay a debt. On Your Mark must decrease its Accounts Receivable account and increase its expense related to uncollectible accounts.

B u s i n e s s Tr a n s a c t i o n On August 25, 2011, On Your Mark wrote off as uncollectible Galvin’s account for $265, Memorandum 170. ANALYSIS

Identify

Classify

/

1. The accounts affected are Uncollectible Accounts Expense, Accounts Receivable (controlling), and Accounts Receivable—Robert Galvin (subsidiary). 2. Uncollectible Accounts Expense is an expense account. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are asset accounts. 3. Uncollectible Accounts Expense is increased by $265. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are decreased by $265.

DEBIT-CREDIT RULE

4. Increases to expense accounts are recorded as debits. Debit Uncollectible Accounts Expense for $265. 5. Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) for $265.

T ACCOUNTS

6.

Accounts Receivable

Uncollectible Accounts Expense Debit  265

Credit 

Credit  265

Debit 

Accounts Receivable Subsidiary Ledger Robert Galvin Credit  265

Debit 

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

2011 Aug. 25 Uncollectible Accounts Expense Accts. Rec./Robert Galvin Memorandum 170

POST. REF.

PAGE DEBIT

13

CREDIT 1

2 6 5 00

2

2 6 5 00

5

4 5

Section 1 The Direct Write-Off Method

696-725_CH24_868829.indd 699

3

699

4/6/06 6:22:06 PM

ACCOUNT Accounts Receivable DATE

2011 Aug.

DESCRIPTION

1 Balance 25 Write-off

ACCOUNT NO. 115 BALANCE

POST. REF.

DEBIT

CREDIT

✓ G13

DEBIT

2 6 5 00

CREDIT

7 8 2 1 42 7 5 5 6 42

ACCOUNT Uncollectible Accounts Expense DATE

DESCRIPTION

2011 Aug. 25

ACCOUNT NO. 675 BALANCE

POST. REF.

DEBIT

G13

2 6 5 00

CREDIT

DEBIT

CREDIT

2 6 5 00

Robert Galvin ADDRESS 10223 Riggs Circle, Mesquite, TX 75181 NAME

DATE

DESCRIPTION

2010 June 4 2011 Aug. 25 Written off as uncollectible

Figure 24–1 Ledger Accounts After an Uncollectible Write-Off

POST. REF.

S14 G13

DEBIT

CREDIT

2 6 5 00

BALANCE

2 6 5 00 2 6 5 00

Figure 24–1 shows how this transaction is posted to the general ledger and the accounts receivable subsidiary ledger. Notice the explanation entered in Robert Galvin’s account. When an account is written off as uncollectible, it is important to note on the subsidiary ledger that the account was not paid off but was written off.

Collecting a Written-Off Account Occasionally, a charge customer whose account was written off as uncollectible later pays the amount owed. When this happens: • •

First, reinstate the customer’s account, or reenter it in the accounting records. Second, record the cash receipt.

B u s i n e s s Tr a n s a c t i o n On September 5 On Your Mark received $265 from Robert Galvin, whose account was written off as uncollectible on August 25, Memorandum 176 and Receipt 1109. First reinstate the account receivable. ANALYSIS

Identify

Classify


/

700

1. The accounts affected are Accounts Receivable (controlling), Accounts Receivable—Robert Galvin (subsidiary), and Uncollectible Accounts Expense. 2. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are asset accounts. Uncollectible Accounts Expense is an expense account. 3. Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) are increased by $265. Uncollectible Accounts Expense is decreased by $265.

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 700

9/15/05 1:40:49 PM

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Accounts Receivable (controlling) and Accounts Receivable—Robert Galvin (subsidiary) for $265. 5. Decreases to expense accounts are recorded as credits. Credit Uncollectible Accounts Expense for $265.

T ACCOUNTS

6.

Accounts Receivable Debit  265

Uncollectible Accounts Expense

Credit


Credit
265

Debit 

Accounts Receivable Subsidiary Ledger Robert Galvin Debit  265

7.

JOURNAL ENTRY

Credit


GENERAL JOURNAL DATE 1 2 3 4

POST. REF.

DESCRIPTION

2011 Sept. 5 Accts. Rec./Robert Galvin Uncollectible Accts. Expense Memorandum 176

PAGE DEBIT

14

CREDIT 1

2 6 5 00

2

2 6 5 00

3 4

5

5

After this transaction has been posted, the cash receipt is recorded as a debit to Cash in Bank for $265 and a credit to Accounts Receivable (controlling) for $265. Also, the subsidiary account Accounts Receivable— Robert Galvin is credited for $265. Receipt 1109 is the source document for this entry. Robert Galvin’s subsidiary ledger account in Figure 24–2 contains data about the sale, write-off, reinstatement, and cash receipt. Robert Galvin ADDRESS 10223 Riggs Circle, Mesquite, TX 75181 NAME

DATE

DESCRIPTION

2010 June 4 2011 Aug. 25 Written off as uncollectible Sept. 5 Reinstated 5

POST. REF.

DEBIT

S14

2 6 5 00

G13 G14 G14

2 6 5 00

CREDIT

BALANCE

2 6 5 00 2 6 5 00 2 6 5 00 2 6 5 00

Figure 24–2 Robert Galvin Account

Section 1 The Direct Write-Off Method

696-725_CH24_868829.indd 701

701

9/15/05 1:40:51 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a diagram similar to the one here to show four journal entries related to the direct write-off method of accounting for uncollectible accounts receivable.

4RANSACTION$ESCRIPTION

*OURNAL%NTRY

Do the Math You are the accounts receivable clerk for Fast and Friendly Shipping. The balance of the Accounts Receivable account is $25,000. For six months you have been trying to collect the amounts owed by three companies: ABC Company, $450; XYZ Company, $500; and Nice Try Company, $350. These accounts are still unpaid. Your supervisor asked you to write off these accounts using the direct write-off method. What is the balance of Accounts Receivable after you write off these accounts as uncollectible?

Problem 24–1 Using the Direct Write-Off Method The Parker Supply Company uses the direct write-off method of accounting for uncollectible accounts.

Instructions In your working papers: 1. Record the following transactions on page 21 of the general journal. 2. Post the transactions to the appropriate accounts.

Date

MEMORANDUM 78

TO: FROM: DATE: SUBJECT:

Accounting Clerk Jon Herbert, Collection Manager November 30, 20-Account write-off

It has been determined by the collection department that Account No. 4698214, Sonya Dickson, in the amount of $630, is uncollectible. This memo is your authorization to write this amount off as uncollectible. Thank you.

Transactions

Apr. 10 Sold merchandise on account to Sonya Dickson, $600 plus $30 sales tax, Sales Slip 928. Nov. 30 Wrote off Sonya Dickson’s account as uncollectible, $630, Memorandum 78. Dec. 30 Received $630 from Sonya Dickson in full payment of her account. This account was written off on November 30, Memorandum 89 and Receipt 277.

702

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 702

9/15/05 1:40:53 PM

SECTION 2

The Allowance Method In Section 1 you learned that the direct write-off method is used by • •

•

small businesses, businesses with few credit customers, and all businesses for tax purposes.

In contrast, businesses that have many credit customers use the allowance method of accounting for uncollectible accounts. This method allows businesses to match revenue with the expenses incurred to earn that revenue. In this section you will learn about the allowance method and continue to journalize transactions involving uncollectible accounts.

Matching Uncollectible Accounts Expense with Revenue

BEFORE YOU

READ

Main Idea

A business using the allowance method estimates the bad debt expense and writes off that amount.

Read to Learn… ➤ why businesses apply

the matching principle to accounts receivable. (p. 703) ➤ how businesses use the matching principle to recognize bad debt expense. (p. 704)

Key Terms

allowance method book value of accounts receivable

Why Do Businesses Use the Matching Principle to Report Uncollectible Accounts? When the direct write-off method of accounting for uncollectible accounts is used, an unpaid account is written off when the business determines that it will not be paid. Under the direct write-off method, it often happens that the sale is recorded in one period, and the uncollectible accounts expense is recorded in the following period. This violates the matching principle. One of the fundamental principles of accounting is that revenue should be matched with the expenses incurred in generating that revenue. This means that expenses incurred to earn revenue should be deducted in the same period that the revenue is recorded. The uncollectible accounts expense should be reported in the year in which the sale takes place. However, the uncollectible account expense is usually not determined with certainty until some future period. That is, a credit sale in the year 2010 may not be determined to be uncollectible until some time in 2011. In order to conform to the matching principle, the credit sales are recorded in the year 2010 and an estimate of the uncollectible accounts expense is also recorded in 2010. Section 2 The Allowance Method

696-725_CH24_868829.indd 703

703

9/15/05 1:40:55 PM

The estimate of uncollectible accounts expense is recorded as an end-ofperiod adjustment. The adjusting entry meets two objectives: 1. Accounts Receivable is reduced to the amount the business can reasonably expect to receive. 2. The estimated uncollectible accounts expense is charged to the current period.

AS YOU

The Allowance Method

READ

How Do You Use the Allowance Method to Report Uncollectible Accounts Expense?

Compare and Contrast

The allowance method of accounting for uncollectible accounts matches the estimated uncollectible accounts expense with sales made during the same period. At the end of the period, the accountant must calculate the uncollectible accounts expense that will result from the sales made during the period. The estimated uncollectible accounts expense is recorded as an adjustment on the work sheet. The two accounts affected by this adjustment are Uncollectible Accounts Expense and Allowance for Uncollectible Accounts. When the adjustment is made, the business does not know exactly which charge customers will not pay the amounts they owe. Therefore, the estimated uncollectible amount cannot be credited to Accounts Receivable (neither the controlling nor the subsidiary). Since the Accounts Receivable account cannot be used to record the estimated uncollectible amount, another account is opened. This account is Allowance for Uncollectible Accounts. Allowance for Uncollectible Accounts is used to summarize the estimated uncollectible accounts receivable of the business. It is classified as a contra asset account.

Reporting Uncollectible Accounts How are the direct write-off method and the allowance method similar? How are they different?

Allowance for Uncollectible Accounts Credit  Increase Side Normal Balance

Debit
Decrease Side

On Your Mark Work For the Year Ended ACCT. NO. 1 2 3

Figure 24–3 Recording the Adjustment for Uncollectible Accounts on the Work Sheet

704

23 24

TRIAL BALANCE ACCOUNT NAME

101 Cash in Bank 115 Accounts Receivable 117 Allowance for Uncollectible Accts. 670 Supplies Expense 675 Uncollectible Accounts Expense

DEBIT

CREDIT

ADJUSTMENTS DEBIT

CREDIT

12 6 5 0 00 44 8 9 3 00 1 2 5 00

(b)1 3 5 0 00

6 0 0 00 (b)1 3 5 0 00

25

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 704

9/15/05 1:41:08 PM

B u s i n e s s Tr a n s a c t i o n On December 31 On Your Mark estimates its uncollectible accounts expense for the year ended December 31 to be $1,350. (Various methods are used to estimate uncollectible accounts expense. You will learn about two of these methods later in this chapter.) 1. The accounts affected are Uncollectible Accounts Expense and Allowance for Uncollectible Accounts. 2. Uncollectible Accounts Expense is an expense account. Allowance for Uncollectible Accounts is a contra asset account. 3. Uncollectible Accounts Expense is increased by $1,350. Allowance for Uncollectible Accounts is increased by $1,350.

Identify

ANALYSIS

Classify
/

DEBIT-CREDIT RULE

4. Increases to expense accounts are recorded as debits. Debit Uncollectible Accounts Expense for $1,350. 5. Increases to contra asset accounts are recorded as credits. Credit Allowance for Uncollectible Accounts for $1,350.

T ACCOUNTS

6.

Credit


Debit  1,350

7.

JOURNAL ENTRY

Allowance for Uncollectible Accounts

Uncollectible Accounts Expense

Credit  1,350

Debit


GENERAL JOURNAL DATE 1 2 3

POST. REF.

DESCRIPTION

20-Adjusting Entries Dec. 31 Uncollectible Accts. Expense Allow. for Uncollectible Accts.

PAGE DEBIT

15

CREDIT 1

1 3 5 0 00

2

1 3 5 0 00

3

4

4

5

5

Athletic Wear Sheet December 31, 20-ADJUSTED TRIAL BALANCE DEBIT

CREDIT

INCOME STATEMENT DEBIT

12 6 5 0 00 44 8 9 3 00

BALANCE SHEET DEBIT

CREDIT

12 6 5 0 00 44 8 9 3 00 1 4 7 5 00

6 0 0 00 1 3 5 0 00

CREDIT

1 2

1 4 7 5 00 6 0 0 00 1 3 5 0 00

3

23 24 25

Figure 24–3 Recording the Adjustment for Uncollectible Accounts on the Work Sheet (continued)

Section 2 The Allowance Method

696-725_CH24_868829.indd 705

705

9/15/05 1:41:09 PM

AS YOU

READ

Instant Recall Book Value Book value of a plant asset is the initial cost minus accumulated depreciation. Book value of accounts receivable is the controlling account balance minus the allowance for uncollectible accounts.

Allowance for Uncollectible Accounts appears on the balance sheet as a deduction from Accounts Receivable. By using Allowance for Uncollectible Accounts: • • •

The balance of Accounts Receivable still equals the total of the customer accounts in the subsidiary ledger. The balance of Allowance for Uncollectible Accounts represents the amount the business estimates to be uncollectible. The difference between Accounts Receivable and Allowance for Uncollectible Accounts represents the book value of accounts receivable.

The book value of accounts receivable is the amount the business can reasonably expect to collect from its accounts receivable. Figure 24–3 on pages 704 and 705 illustrates how this adjustment is recorded and extended on the work sheet. Notice that Allowance for Uncollectible Accounts has a $125 balance in the Trial Balance Credit column. This balance is carried over from previous years. If the previous years’ uncollectible accounts exactly equaled the estimate, Allowance for Uncollectible Accounts would have a zero balance. This seldom happens. Also notice that the new balance is extended first to the Adjusted Trial Balance Credit column and then to the Balance Sheet Credit column.

Reporting Estimated Uncollectible Amounts on the Financial Statements Figure 24–4 Reporting Uncollectible Accounts on the Income Statement

The Uncollectible Accounts Expense account appears on On Your Mark’s income statement as an expense. See Figure 24– 4 for the placement of the Uncollectible Accounts Expense account in its partial income statement. On Your Mark Athletic Wear Income Statement For the Year Ended December 31, 20--

Operating Expenses Supplies Expense Uncollectible Accounts Expense

6 0 0 00 1 3 5 0 00

Total Operating Expenses Operating Income

38 3 4 5 00 24 6 9 8 00

On Your Mark Athletic Wear Balance Sheet December 31, 20--

Figure 24–5 Reporting Allowance for Uncollectible Accounts on the Balance Sheet 706

Assets Cash in Bank Accounts Receivable Less: Allowance for Uncollectible Accounts

12 6 5 0 00 44 8 9 3 00 1 4 7 5 00 43 4 1 8 00

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 706

9/15/05 1:41:11 PM

On the balance sheet, Allowance for Uncollectible Accounts is listed immediately below Accounts Receivable in the Assets section. See On Your Mark’s partial balance sheet in Figure 24–5. Notice that the balances of Accounts Receivable and Allowance for Uncollectible Accounts are entered in the first amount column. The difference between the two balances—the book value of accounts receivable—is entered in the second amount column.

AS YOU

READ

Instant Recall Adjusting Entry An adjusting entry affects one temporary account and one permanent account.

Journalizing the Adjusting Entry for Uncollectible Accounts After the work sheet has been completed and the financial statements have been prepared, the adjusting entries are journalized. The information for the adjusting entries is found in the Adjustments section of the work sheet as shown in Figure 24–3 on pages 704 and 705.

GENERAL JOURNAL DATE 1 2

20-Dec.

3

POST. REF.

DESCRIPTION

Adjusting Entries 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts

14

PAGE DEBIT

CREDIT 1

675 117

1 3 5 0 00

2

1 3 5 0 00

4

3 4

ACCOUNT Allowance for Uncollectible Accounts DATE

20-Dec.

DESCRIPTION

1 Balance 31 Adjusting Entry

POST. REF.

ACCOUNT NO. 117 BALANCE

DEBIT

CREDIT

✓ G14

DEBIT

CREDIT

1 2 5 00 1 4 7 5 00

1 3 5 0 00

ACCOUNT Uncollectible Accounts Expense DATE

20-Dec.

DESCRIPTION

31 Adjusting Entry

POST. REF.

G14

ACCOUNT NO. 675 BALANCE DEBIT

1 3 5 0 00

CREDIT

DEBIT

CREDIT

1 3 5 0 00

See Figure 24–6 for the way the adjusting entry for the estimated uncollectible accounts expense is recorded in the general journal and posted to the appropriate general ledger accounts. At the end of the period, the balance of the Uncollectible Accounts Expense account is closed, along with the balances of the other expense accounts, to Income Summary. Uncollectible Accounts Expense has a zero balance at the beginning of the next period. The balance of Allowance for Uncollectible Accounts is not affected by the closing entries. It is a permanent account, and its balance at the beginning of the next period remains $1,475.

Figure 24–6 Journalizing and Posting the Adjusting Entry for Uncollectible Accounts

Section 2 The Allowance Method

696-725_CH24_868829.indd 707

707

9/15/05 1:41:15 PM

Writing Off Uncollectible Accounts Receivable When it becomes clear that a charge customer is not going to pay the amount owed, the accountant removes the uncollectible account from the accounting records. Allowance for Uncollectible Accounts acts as a reservoir; that is, at the end of the period, the adjusting entry “fills it up.” The account balance is saved until it is needed some time in the future. When a charge customer’s account finally proves uncollectible, the business dips into that reservoir to write off the account. In other words Allowance for Uncollectible Accounts is reduced when a specific account is written off. Let’s look at an example.

B u s i n e s s Tr a n s a c t i o n On April 18, after many attempts to collect the amount owed, On Your Mark decides to write off the account of Megan Sullivan for $150, Memorandum 236. ANALYSIS

Identify

Classify


/

1. The accounts affected are Allowance for Uncollectible Accounts, Accounts Receivable (controlling), and Accounts Receivable—Megan Sullivan (subsidiary). 2. Allowance for Uncollectible Accounts is a contra asset account. Accounts Receivable (controlling) and Accounts Receivable—Megan Sullivan (subsidiary) are asset accounts. 3. Allowance for Uncollectible Accounts is decreased by $150. Accounts Receivable (controlling) and Accounts Receivable—Megan Sullivan (subsidiary) are decreased by $150.

DEBIT-CREDIT RULE

4. Decreases to contra asset accounts are recorded as debits. Debit Allowance for Uncollectible Accounts for $150. 5. Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) and Accounts Receivable—Megan Sullivan (subsidiary) for $150.

T ACCOUNTS

6.

Allowance for Uncollectible Accounts Debit
150

Credit 

Accounts Receivable Debit 

Credit
150

Accounts Receivable Subsidiary Ledger Megan Sullivan Debit 

708

Credit
150

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 708

9/15/05 1:41:17 PM

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE 1 2 3 4

POST. REF.

DESCRIPTION

20-Apr. 18 Allow. for Uncollectible Accts. Accts. Rec./Megan Sullivan Memorandum 236

PAGE DEBIT

16

CREDIT 1

1 5 0 00

2

1 5 0 00

4

5

5

Under the allowance method, the write-off of a specific account does not affect an expense account. Recall that the expense was already recorded as an adjusting entry. The adjusting entry recorded the entire estimated expense for the period, not just this one customer’s bad debt.

Collecting an Account Written Off by the Allowance Method A charge customer whose account was written off as uncollectible might later pay the amount owed. When this happens: • •

3

AS YOU

READ

In Your Own Words Reinstatement What does it mean to reinstate an account receivable?

First, reinstate the customer’s account. Second, record the cash receipt.

B u s i n e s s Tr a n s a c t i o n On November 19 On Your Mark received a check for $150 from Megan Sullivan, whose account was written off April 18, Memorandum 294 and Receipt 2243. ANALYSIS

Identify

Classify


/

DEBIT-CREDIT RULE

1. The accounts affected are Accounts Receivable (controlling), Accounts Receivable—Megan Sullivan (subsidiary), and Allowance for Uncollectible Accounts. 2. Accounts Receivable (controlling) and Accounts Receivable—Megan Sullivan (subsidiary) are asset accounts. Allowance for Uncollectible Accounts is a contra asset account. 3. Accounts Receivable (controlling) and Accounts Receivable— Megan Sullivan (subsidiary) are increased by $150. Allowance for Uncollectible Accounts is increased by $150.

4. Increases to asset accounts are recorded as debits. Debit Accounts Receivable (controlling) and Accounts Receivable—Megan Sullivan (subsidiary) for $150. 5. Increases to contra asset accounts are recorded as credits. Credit Allowance for Uncollectible Accounts for $150.

Section 2 The Allowance Method

696-725_CH24_868829.indd 709

709

9/15/05 1:41:22 PM

T ACCOUNTS

6.

Allowance for Uncollectible Accounts

Accounts Receivable Debit  150

Credit


Credit  150

Debit


Accounts Receivable Subsidiary Ledger Megan Sullivan Debit  150

JOURNAL ENTRY

Credit


7. GENERAL JOURNAL DATE 1 2 3 4

POST. REF.

DESCRIPTION

20-Nov. 19 Accts. Rec./Megan Sullivan Allow. for Uncollectible Accts. Memorandum 294

PAGE DEBIT

18

CREDIT 1

1 5 0 00

2

1 5 0 00

3 4

5

5

After this transaction to reinstate the customer’s account is posted, the cash receipt transaction is journalized and posted. Figure 24–7 shows Megan Sullivan’s account after the cash receipt transaction is posted. The account shows that: 1. The account had been declared uncollectible and was written off. 2. The account was reinstated. 3. The account was collected in full.

NAME

Megan Sullivan 883 Bisbee Drive, Dallas, TX 75211

ADDRESS

DATE

20-Jan. Apr. Nov.

DESCRIPTION

1 Balance 18 Written off as uncollectible 19 Reinstated 19

POST. REF.

✓ G16 G18 G18

DEBIT

CREDIT

BALANCE

1 5 0 00 1 5 0 00 1 5 0 00

1 5 0 00 1 5 0 00

Figure 24–7 Megan Sullivan Account

710

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 710

9/15/05 1:41:23 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a diagram like the one shown here to describe what happens when payment is received for an account receivable that had been written off.

7HEN0AYMENTIS2ECEIVEDFORAN!CCOUNT2ECEIVABLE4HAT7AS7RITTEN/FF

Do the Math A review of the accounting records for Mary Sawyer’s business, Secret Garden, revealed a disturbing trend. Her uncollectible accounts continue to increase. You suspect that Mary is far too nice about extending “in store” credit. You strongly recommend that she change her credit policies and collect on the outstanding accounts for this year. However Mary does not seem to understand the big picture, and she requested an illustration. Use a line graph to chart the uncollectibles for the past five years using the following figures. Year 1 $1,500 Year 2 $1,875 Year 3 $2,300

Year 4 $2,422 Year 5 $2,800

Problem 24–2 Writing Off Accounts Using the Allowance Method Taylor Furniture Company Inc. uses the allowance method to account for uncollectible accounts.

Instructions In your working papers: 1. Record the following transactions in the general journal on page 24. 2. Post the transactions to the appropriate accounts. 3. Prepare the Assets section of the balance sheet for Taylor Furniture Company Inc. using the partial general ledger in your working papers. The balance of other asset accounts are Merchandise Inventory, $42,000; Supplies, $1,500; and Prepaid Insurance, $1,200. Date

Transactions

May

4 Using the allowance method, wrote off the account of Jack Bowers for $1,050 as uncollectible, Memorandum 241. Nov. 18 Received $1,050 from Jack Bowers in full payment of his account, which was written off May 4, Memorandum 321 and Receipt 1078. Dec. 31 The adjusting entry for the estimated uncollectible accounts expense for the year ended December 31 was $1,850.

Section 2 The Allowance Method

696-725_CH24_868829.indd 711

711

9/15/05 1:42:05 PM

SECTION 3

BEFORE YOU

READ

Main Idea

Different methods can be used to estimate the allowance for uncollectible accounts. Two methods are percentage of net sales and aging of accounts receivable.

Read to Learn… ➤ how to use the

percentage of net sales method. (p. 712) ➤ how to use the aging of accounts receivable method. (p. 713)

Key Terms

percentage of net sales method aging of accounts receivable method

Estimating Uncollectible Accounts Receivable As you learned in the previous section, businesses estimate the uncollectible accounts expense at the end of the period using the allowance method. In this section you will learn about the percentage of net sales and the aging of accounts receivable methods. These two ways to estimate uncollectible accounts expenses are based on judgment and past experience.

Percentage of Net Sales Method How Do You Use Net Sales to Compute Uncollectible Amounts? When using the percentage of net sales method for estimating uncollectible accounts expense, the business assumes that a certain percentage of each year’s net sales will be uncollectible. To find the adjustment for uncollectible accounts expense: 1. 2. 3. 4.

Determine the percentage. Calculate net sales. Multiply net sales by the percentage. Enter the amount calculated above on the work sheet.

Let’s see how this method works. First, the percentage is determined. As you can see, in recent years On Your Mark’s actual uncollectible accounts have been approximately 2 percent of net sales. On this basis, On Your Mark’s accountant believes that the 2 percent figure should be used to estimate uncollectible accounts expense.

Year 2008 2009 2010 Totals

Net Sales $ 59,000 65,000 67,000 $191,000

Uncollectible Accounts $1,062 1,430 1,273 $3,765

Percentage (1.8%) (2.2%) (1.9%) (2.0%)

Second, the amount of net sales is calculated. Remember that net sales equals sales minus sales discounts and sales returns and allowances. As shown, net sales for On Your Mark is $67,500.

Sales Less: Sales Discounts Sales Returns and Allowances Net Sales

$74,500 $3,000 4,000


7,000 $67,500

Third, the uncollectible accounts expense for the current year is determined by multiplying net sales by the percentage. On Your Mark’s 712

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 712

9/15/05 1:42:08 PM

uncollectible accounts expense for the period is estimated to be $1,350 ($67,500  .02). Under this method the amount calculated is recorded as the adjustment on the work sheet and later is entered into the accounting records by journalizing the adjusting entry. At the beginning of the next period, Allowance for Uncollectible Accounts will have a credit balance of $1,475 ($1,350 adjustment plus $125 existing balance in the account).

Aging of Accounts Receivable Method How Do You Use Accounts Receivable to Compute Uncollectible Amounts? The aging of accounts receivable method classifies the accounts receivables according to the number of days each account is past due. This method assumes that the longer an account is overdue, the less likely it is to be collected. Use these steps to find the adjustment for uncollectible accounts expense: 1. Age, or classify and group, each account according to the number of days it is past due. 2. Use past experience to determine the percentage of each group that will be uncollectible. 3. Multiply the uncollectible amount for each group by the percentage for that group. 4. Add the results for all groups. 5. Enter on the work sheet the total estimated uncollectible amount (calculated above) adjusted by any balance in Allowance for Uncollectible Accounts.

CULTURAL Diversity Mealtime When you host a business meal, be aware that your guests’ eating and drinking choices may be tied to their religion or culture. Several religions prohibit pork. The Islamic religion outlaws both pork and alcohol. Hindus do not eat beef. Some cultures and religions are vegetarian.

Let’s look at an example. First, each customer account is aged, or classified and grouped according to the number of days it is overdue. The computer printout in Figure 24–8 is a schedule of On Your Mark’s aged accounts receivable that has grouped each customer account. On Your Mark Athletic Wear ANALYSIS OF ACCOUNTS RECEIVABLE December 31, 20--

Account ID DIM GAL KLE MON RAH RAM SUL TAM WON YOU

CustomerÕs Name

Total Amount Owed

Not Yet Due

Joe Dimaio $ 300.00 Robert Galvin 50.00 Casey Klein 800.00 Anita Montero 200.00 Shashi Rahim 175.00 Gabriel Ramos 1,000.00 Megan Sullivan 40.00 TammyÕs Fitness 225.00 Kim Wong 306.50 Lara Young 750.00

$

TOTALS

$ 2,475.00

$ 3,846.50

Days Past Due 1Ð30

31Ð60

61Ð90

Over 90

300.00 $ 50.00 $ 800.00 200.00 $ 175.00 1,000.00 $ 40.00 225.00 306.50 750.00 $ 356.50

$ 175.00

$ 40.00

$ 800.00

Figure 24–8 ComputerGenerated Analysis of Accounts Receivable

Section 3 Estimating Uncollectible Accounts Receivable

696-725_CH24_868829.indd 713

713

9/15/05 1:42:11 PM

On Your Mark Athletic Wear AGING OF ACCOUNTS RECEIVABLE Estimated Uncollectible Amount December 31, 20--

Age Group

Amount

Not yet due 1Ð30 days past due 31Ð60 days past due 61Ð90 days past due Over 90 days past due

$ 2,475.00 356.50 175.00 40.00 800.00

Total

$ 3,846.50

Estimated Percentage Uncollectible

Estimated Uncollectible Amount

2% 4% 10% 20% 80%

$ 49.50 14.26 17.50 8.00 640.00 $ 729.26

Figure 24–9 Accounts Receivable Aging Schedule Next, On Your Mark’s accountant estimates what percentage of each group will be uncollectible based on past experience. The percentages range from 2 to 80 percent. Third, the total uncollectible amount for each group is multiplied by the percentage for that group. The resulting amounts are the estimated uncollectible amounts for each group. The computer printout in Figure 24–9 illustrates how the estimated uncollectible amount is determined from the accounts receivable analysis in Figure 24–8. As you can see, On Your Mark estimates that a total of $729.26 of its accounts will be uncollectible. This total represents the end-of-period balance of Allowance for Uncollectible Accounts. Finally, an adjustment is entered on the work sheet. This adjustment will bring the balance of Allowance for Uncollectible Accounts to $729.26, the estimated amount. Suppose the balance of Allowance for Uncollectible Accounts reported in the Trial Balance Credit column is $49.80. To determine the adjustment, subtract the balance of Allowance for Uncollectible Accounts from the total estimated uncollectible amount. The adjustment amount is $679.46 ($729.26
$49.80). After the adjusting entry has been journalized and posted, the balance of Allowance for Uncollectible Accounts is $729.26 (the balance as determined by the aging schedule).

Uncollectible Accounts Expense Debit  Adj. 679.46

714

Credit


Allowance for Uncollectible Accounts Debit


Credit  Bal. 49.80 Adj. 679.46 Bal. 729.26

Chapter 24 Uncollectible Accounts Receivable

696-725_CH24_868829.indd 714

9/15/05 1:42:15 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a diagram like this one to compare and contrast the two methods for estimating uncollectible accounts discussed in Section 3.

Do the Math Hernando’s Card Shop is planning to expand. Before it expands, the owner wants to review the uncollectible accounts. Hernando asks you to calculate the percentage of uncollectible accounts per year. Year 1 Year 2 Year 3 Year 4

Net Sales $23,000 28,750 46,000 52,000

Uncollectible Accounts $ 800 1,200 1,345 1,150

Problem 24–3 Estimating Uncollectible Accounts Expense Using the Percentage of Net Sales Method Following are the end-of-period account balances for several stationery and office supply companies. Each company uses the percentage of net sales method to estimate its uncollectible accounts expense. The percentage used by each company is also listed.

Instructions Using the form provided in your working papers: 1. Calculate the amount of the adjustment for uncollectible accounts expense using the percentage of net sales method. 2. Record the adjusting entry for the estimated uncollectible accounts expense for Davis Inc.

Sales Andrews Co. $142,360 The Book Nook 209,100 Cable Inc. 173,270 Davis Inc. 65,460 Ever-Sharp Co. 95,085

Sales Discounts $1,423 3,180 1,730 650 900

Sales Returns and Allowances $ 936 1,139 1,540 690 1,035

Percentage of Net Sales Uncollectible 2 1 11⁄2 2 11⁄4

Section 3 Estimating Uncollectible Accounts Receivable

696-725_CH24_868829.indd 715

715

9/15/05 1:42:50 PM

Summary

CH A P T ER 2 4 Key Concepts

1. Customer accounts that are uncollectible are expenses to the business. When it is apparent that a customer account is uncollectible, it is written off using either the direct write-off method or the allowance method. The allowance method enables the business to match sales revenue and uncollectible accounts expense in the same period. 2. An uncollectible account, or bad debt, is created Allowance for Uncollectible Accounts when a customer fails to pay the amount due on account. Allowance for Uncollectible Credit Debit Accounts is used to summarize the estimated   uncollectible accounts receivable of a Increase Side Decrease Side business. The estimate is based on judgment Normal Balance and past experience. 3. Write off a specific uncollectible account using the direct write-off method: Uncollectible Accounts Expense Debit  xxx

Credit 

Accounts Receivable (controlling/subsidiary) Debit 

Credit  xxx

4. At the end of the fiscal period, the accountant calculates the amount of bad debt expense that will result from sales during the period. This estimated uncollectible account expense appears as an adjustment on the work sheet. 5. Record the adjusting entry using the allowance method: Uncollectible Accounts Expense Debit  xxx

Credit 

Allowance for Uncollectible Accounts Debit 

Credit  xxx

6. Write off a specific account using the allowance method: Allowance for Uncollectible Accounts Debit  xxx

Credit 

Accounts Receivable (controlling/subsidiary) Debit 

Credit  xxx

7. When a charge customer whose account was previously written off pays the amount owed, a. reinstate the customer’s account, and b. record the cash receipt. Collection of an account that was written off using the direct write-off method. a. Reinstate the customer’s account. Accounts Receivable (controlling/subsidiary) Debit  xxx

716

Credit 

Uncollectible Accounts Expense Debit 

Credit  xxx

Chapter 24 Summary

696-725_CH24_868829.indd 716

4/6/06 6:22:43 PM

Summary

C HAPT E R 24

b. Record the cash receipt by debiting Cash in Bank and crediting Accounts Receivable (controlling and subsidiary). Collection of an account that was written off using the allowance method. a. Reinstate the customer’s account. Accounts Receivable (controlling/subsidiary) Debit  xxx

Allowance for Uncollectible Accounts

Credit 

Credit  xxx

Debit 

b. Record the cash receipt by debiting Cash in Bank and crediting Accounts Receivable (controlling and subsidiary). 8. Two common methods used to estimate uncollectible Accounts Receivable are the percentage of net sales method and the aging of accounts receivable method. Percentage of net sales method:

Net Sales  Percentage of Net Sales Estimated Uncollectible  Uncollectible Accounts Expense Aging of accounts receivable method:

Age Group Not yet due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due Over 180 days past due

Estimated Percentage Amount  Uncollectible  xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx

Estimated Uncollectible Amount

xx xx xx xx xx xx

xxxx xxxx xxxx xxxx xxxx xxxx

Total

xxxx

Allowance for Uncollectible Accounts, end of period

Key Terms aging of accounts receivable method

direct write-off method

(p. 698)

(p. 713)

percentage of net sales method

(p. 712)

allowance method

(p. 704)

uncollectible account

(p. 698)

book value of accounts receivable

(p. 706)

Chapter 24 Summary

696-725_CH24_868829.indd 717

717

4/6/06 6:22:45 PM

C H A P T ER 2 4 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

7.

8.

Accounting for Uncollectible Accounts a. Explain the difference between the direct write-off method and the allowance method. b. Which method is likely to be used by a business with many charge customers? Which is likely to be used by a business that sells mainly on a cash basis? Determining Uncollectible Accounts Receivable a. How does the direct write-off method identify the uncollectible accounts expense amount? b. What factors does the allowance method consider in determining bad debt expense? Direct Write-Off Method a. Which accounting principle does the direct write-off method violate? b. In the direct write-off method of recording an uncollectible account receivable, which accounts are debited and credited? Bad Debts Expense a. What is another term for bad debts expense? b. What can businesses do to prevent bad debts? Adjusting Entry a. What accounts are debited and credited in the adjusting entry to record uncollectible accounts using the allowance method? b. What is the account classification of Allowance for Uncollectible Accounts? Allowance Method a. When does the allowance method recognize the bad debt expense for a year’s sales? b. When a specific account receivable is written off using the allowance method, which accounts are debited and credited? Collecting a Written-Off Account a. What is the first journal entry made when a customer pays an amount that was previously written off? Name the accounts debited and credited for both methods. b. In the second journal entry, which accounts are debited and credited? Estimating Uncollectible Accounts Expense a. Describe the percentage of net sales method. b. Describe the aging of accounts receivable method.

Apply Key Terms As a quick review of uncollectible accounts, define each of the following key terms and explain its relationship to Accounts Receivable. aging of accounts receivable method allowance method

718

book value of accounts receivable direct write-off method

percentage of net sales method uncollectible account

Chapter 24 Review and Activities

696-725_CH24_868829.indd 718

9/15/05 1:42:59 PM

Computerized Accounting

C HAPT E R 24

Writing Off Uncollectible Accounts Receivable Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Preparing an aged accounts receivable report

• Examine each customer account and organize it based on its due date. • Using accounting stationery, list each customer’s account in the appropriate past due columns.

• A preformatted report feature allows the accountant to generate an aging schedule. The software pulls data from information stored in the accounts receivable ledgers.

Writing off an uncollectible account

• Determine the method to be used to write off uncollectible accounts. • Record a general journal entry to record the write-off and post it to the general ledger and subsidiary ledger. • Calculate new balances.

• Determine the method to be used to write off uncollectible accounts. • Outstanding invoices due are tied to the customer’s ID and assigned to the account, Allowance for Uncollectible Accounts.

Q&A Peachtree Question

Answer

How do I set up defaults for the aging of Accounts Receivable ledgers in Peachtree?

1. From the Maintain menu, select Default Information. 2. Select Customers to set or to change default information. (In Peachtree, Accounts Receivable ledgers are referred to as customer accounts.) 3. Click on the Account Aging tab, and set the account defaults.

How do I write off an uncollectible account in Peachtree?

1. 2. 3. 4.

From the Tasks menu, select Receipts and enter the Customer ID. In the Cash Account field, select Allowance for Uncollectible Accounts. Click the Apply to Invoices tab. Select the Pay box next to the invoices you wish to write off.

QuickBooks Q & A QuickBooks Question

Answer

How do I set up defaults for the aging of Accounts Receivable ledgers in QuickBooks?

1. From the Edit menu, select Preferences and click on Reports & Graphs. 2. Click the Company Preferences tab. 3. Choose either the Age from due date or Age from transaction radio button to set how Accounts Receivable are aged.

How do I write off an uncollectible account in QuickBooks?

1. From the Company menu, select Make General Journal Entries. 2. Enter the date and reference, the debit amount, the description, and Uncollectible Accounts Expense as the account to be debited. 3. Enter the credit amount, the description, the customer name, and Accounts Receivable as the account to be credited.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 24 Computerized Accounting

696-725_CH24_868829.indd 719

719

9/15/05 1:43:03 PM

Problems

C H A P T ER 2 4 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 24–4 1. Select the problem set for Sunset Surfwear. 2. Rename the company and set the system date. 3. Record the transactions to write off bad debts and reinstate Alex Hamilton’s account. 4. Print a Cash Receipts Journal, Sales Journal, Customer Ledgers, and General Ledger. 5. Complete the Analyze activity. 6. End the session.

Step–by–Step Instructions: Problem 24–5 1. Select the problem set for InBeat CD Shop. 2. Rename the company and set the system date. 3. Record the uncollectible accounts adjustment. 4. Print the General Journal and General Ledger. 5. Complete the Analyze activity. 6. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 24–4 1. Restore the Problem 24-4.QBB file. 2. Record the transactions to write off bad debts and reinstate Alex Hamilton’s account. 3. Print a Journal, General Ledger report, and Customer Balance Summary report. 4. Complete the Analyze activity. 5. Back up your work.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 24–4 Using the Direct Write-Off Method Sunset Surfwear uses the direct write-off method of accounting for uncollectible accounts.

Instructions 1. In your working papers, record the following transactions on page 14 in the general journal. 2. Post the transactions to the appropriate accounts. Date

June

Transactions

1

Wrote off the $288.75 account of Alex Hamilton as uncollectible, Memorandum 223. 4 Wrote off the $243.60 account of Helen Jun as uncollectible, Memorandum 249. 14 Wrote off the $57.75 account of Nate Moulder as uncollectible, Memorandum 255. 22 Received $288.75 from Alex Hamilton in full payment of his account, Memorandum 298 and Receipt 944. 29 Wrote off the $100.80 account of Martha Adams as uncollectible, Memorandum 329.

Analyze

Problem 24–5 Calculating and Recording Estimated Uncollectible Accounts Expense InBeat CD Shop uses the percentage of net sales method of accounting for uncollectible accounts. At the end of the period, the following account balances appeared on InBeat’s trial balance: Accts. Rec. Sales Sales Disc.

$110,000 900,000 10,000

Allow. for Uncoll. Accts. Sales Ret. and Allow. Uncoll. Accts. Expense

$ 4,000 50,000 —

Instructions 1. In your working papers, calculate the amount of the adjustment for uncollectible accounts for the period ended June 30. Management estimates that uncollectible accounts will be 1 percent of net sales. 2. Journalize the adjusting entry on page 8 in the general journal. 3. Post the adjusting entry to the general ledger accounts.

Analyze 720

Describe the impact on Accounts Receivable and Uncollectible Accounts Expense when an account is written off.

Determine the book value of accounts receivable.

Chapter 24 Problems

696-725_CH24_868829.indd 720

4/6/06 6:22:51 PM

Problems Problem 24–6 Writing Off Accounts Under the Allowance Method Shutterbug Cameras uses the allowance method of accounting for uncollectible accounts.

Instructions 1. In your working papers, record the following transactions on page 9 in the general journal. 2. Post the transactions to the appropriate accounts. 3. Prepare the Assets section of the balance sheet for Shutterbug Cameras using the partial general ledger in the working papers. The balances of other asset accounts are Merchandise Inventory, $33,000; Supplies, $2,000; and Prepaid Insurance, $1,200. Date

June

Transactions

2 Wrote off the $593.25 account of Kalla Booth as uncollectible, Memorandum 329. 9 Wrote off the $840 account of Click Studios as uncollectible, Memorandum 343. 10 Received $131.25 from Jimmy Thompson in full payment of his account, which was written off on November 10, Memorandum 349 and Receipt 210. 12 Wrote off the $945 account of FastForward Productions as uncollectible, Memorandum 474. 30 Recorded the adjusting entry for estimated uncollectible accounts for the period. The uncollectible accounts expense estimate is based on 2 percent of the net sales of $150,000. 30 Recorded the closing entry for Uncollectible Accounts Expense.

Analyze

Calculate the book value of the accounts receivable after the closing entries have been posted.

Problem 24–7 Estimating Uncollectible Accounts Expense Cycle Tech Bicycles uses the allowance method of accounting for uncollectible accounts. The company estimates the uncollectible amount by aging its accounts receivable accounts.

Instructions 1. Complete the analysis of accounts receivable that is included in your working papers. 2. Calculate the estimated uncollectible amount. Use the form provided in your working papers.

C HAPT E R 24 SOURCE DOCUMENT PROBLEM Problem 24–6 Use the source documents in your working papers to record the transactions for this problem.

SMART GUIDE Step–by–Step Instructions: Problem 24–6 1. Select the problem set for Shutterbug Cameras. 2. Rename the company and set the system date. 3. Record the transactions. 4. Record the uncollectible accounts adjustment. 5. Record the closing entry for Uncollectible Accounts Expense. 6. Print Cash Receipts and Sales Journals, Customer Ledgers, General Journal, General Ledger, and Balance Sheet. 7. Complete the Analyze activity. 8. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 24–6 1. Restore the Problem 24-6.QBB file. 2. Record the transactions. 3. Record the adjustment for estimated uncollectible accounts. 4. Record the closing entry for Uncollectible Accounts Expense. 5. Print a Journal, Balance Sheet, General Ledger, and Customer Balance Summary. 6. Complete the Analyze activity. 7. Back up your work.

CONTINUE Chapter 24 Problems

696-725_CH24_868829.indd 721

721

4/6/06 6:22:53 PM

Problems

C H A P T ER 2 4

SMART GUIDE Step–by–Step Instructions: Problem 24–7 1. Select the problem set for Cycle Tech Bicycles. 2. Rename the company and set the system date. 3. Complete the analysis of the accounts receivable in your workbook. 4. Record the uncollectible accounts adjustment. 5. Print a General Journal and General Ledger. 6. Complete the Analyze activity. 7. End the session.

Step–by–Step Instructions: Problem 24–8 1. Select the problem set for River’s Edge Canoe. 2. Rename the company and set the system date. 3. Record the uncollectible accounts adjustment. 4. Print a General Journal. 5. Print a Balance Sheet, a Statement of Retained Earnings, and an Income Statement. 6. Click the Save Preclosing Balances button. 7. Close the fiscal year. 8. Print a post-closing Trial Balance. 9. Complete the Analyze activity. 10. End the session.

Step–by–Step Instructions: Problem 24–9 1. Select the problem set for Buzz Newsstand. 2. Rename the company and set the system date. 3. Record the uncollectible accounts transactions. 4. Print a Cash Receipts Journal, Sales Journal, and Customer Ledgers. 5. Complete the Analyze activity. 6. End the session.

722

3. Journalize the June 30 adjusting entry for uncollectible accounts expense on page 11 of the general journal. Before the adjusting entry, Allowance for Uncollectible Accounts had a credit balance of $142. 4. Post the adjusting entry to the general ledger accounts.

Analyze

Calculate the book value of accounts receivable.

Problem 24–8 Reporting Uncollectible Amounts on the Financial Statements The work sheet for River’s Edge Canoe & Kayak is included in your working papers. The trial balance is complete, and all of the adjustments except the one required for uncollectible accounts have been entered.

Instructions 1. Record the adjustment for uncollectible accounts expense in the Adjustments section of the work sheet. Uncollectible accounts are estimated to be 1.5 percent of net sales. Label the adjustment (a). 2. Complete the work sheet. 3. Prepare an income statement, a statement of retained earnings, and a balance sheet. 4. Record the adjusting entries on page 18 of the general journal. 5. Post the adjusting entries. Record and post the closing entries.

Analyze

CHALLENGE PROBLEM

Compute the balance of Allowance for Uncollectible Accounts before and after the adjusting entry.

Problem 24–9 Using the Allowance Method for Write-Offs

Buzz Newsstand uses the allowance method for uncollectible accounts.

Instructions In your working papers, journalize the following transactions on page 13 in the general journal. Post the transactions to the account of Lee Adkins. Date

Transactions

Jan. 14 Wrote off the $194.50 account of Lee Adkins as uncollectible, Memorandum 498. June 25 Received a check for $30 from Lee Adkins on account, Memorandum 767 and Receipt 98. Dec. 10 Received notice that Lee Adkins declared bankruptcy. Received 40 percent of the balance not paid, Receipt 288 and Memorandum 941.

Analyze

Conclude which account you would debit when writing off an account using the direct write-off method instead of the allowance method.

Chapter 24 Problems

696-725_CH24_868829.indd 722

9/15/05 1:43:08 PM

Winning Competitive Events

CHA PTER 24

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. The ________ of accounting for uncollectible accounts matches potential bad debts expense with the sales from the same period. a. direct write-off method b. matching principle c. aging of accounts receivable method d. allowance method 2. Under the allowance method, the entry to record the estimated bad debts expense a. has no effect on net income. c. has no effect on total assets. b. increases net income. d. reduces total assets. 3. Cameron Corporation ages accounts receivable to estimate uncollectibles. The aging schedule estimates $2,340 of uncollectible accounts. Prior to adjustment, allowance for uncollectible accounts has a debit balance of $300. The expense reported on the income statement for uncollectibles will be c. $2,340. a. $2,640. b. $2,040. d. $300. 4. Vasquez Construction uses the percentage of sales method to estimate uncollectibles. Net credit sales for the current year amount to $500,000 and management estimates 2% will be uncollectible. Allowance for doubtful accounts prior to adjustment has a debit balance of $890. The amount of expense reported on the income statement will be a. $10,000. c. $9,110. b. $10,890. d. $890.

Business Professionals of America MULTIPLE CHOICE 5. SPH, Inc. uses the direct write-off method for uncollectible accounts. The entry to record the $64 invoice that Dave Case did not pay is a. debit Accounts Receivable/Dave Case, credit Uncollectible Accounts Expense. b. debit Allowance for Uncollectible Accounts, credit Accounts Receivable/Dave Case. Need More Help? c. debit Uncollectible Accounts Go to glencoeaccounting.glencoe.com and Expense, credit Accounts click on Student Center. Click on Winning Receivable/Dave Case. Competitive Events and select Chapter 24. d. debit Uncollectible Accounts • Practice Questions and Test-Taking Tips Expense, credit Cash. • Concept Capsules and Terminology glencoeaccounting.glencoe.com

696-725_CH24_868829.indd 723

Chapter 24 Winning Competitive Events

723

10/13/05 11:52:20 PM

C H A P T ER 2 4 Critical Thinking

Uncollectible Accounts Receivable

CASE

STUDY

Merchandising Business: Formal Wear

ETHICS

Early Write-Off

a mattoefr

))

$ )) Communicating ACCOUNTING

724

Real-World Applications and Connections

1. Before a business extends credit, it should determine whether potential credit customers are likely to pay their bills. Explain why this is important. 2. Contrast the direct write-off method and the allowance method. 3. Prepare the journal entry to write off an uncollectible account using (a) the direct write-off method and (b) the allowance method. 4. Compare the journal entries to reinstate a customer account that had been written off using (a) the direct write-off method and (b) the allowance method. 5. To determine the amount of the adjustment for uncollectible accounts expense, develop (a) a formula for the percentage of net sales method and (b) a step-by-step procedure for the aging of accounts receivable method. 6. Evaluate (a) the direct write-off method and (b) the allowance method. The Black Tie rents formal attire. It accepts cash, debit cards, credit cards, and personal checks. To reserve an outfit requires a down payment. The balance, due 10 days after the return, is recorded as an account receivable. Lately the store has had problems collecting accounts receivable. Customers say they do not receive an invoice for the balance until it is past due. INSTRUCTIONS 1. Develop a plan for quality that will reduce uncollectible accounts. Your plan must be attainable and measurable. 2. Determine how to implement your plan. Will you need to change procedures, modify the accounts receivable system, hire another clerk, or retrain personnel? Suppose you are an accounts receivable clerk for an advertising agency. Your friend, Hector, owns a deli and has hired your agency to create an ad for a local magazine. Hector’s business is having financial difficulties, and he asks you to write off his account although it should not be considered uncollectible yet. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Collecting an Outstanding Account At The Music Connection, you handle accounts receivable and uncollectible accounts. Six months ago a new dance club bought an expensive, state-of-the-art music system on account. It is still unpaid. Write the customer a letter requesting payment. State that if payment is not received within 30 days, you will turn the account over to a collection agency.

Chapter 24 Real-World Applications and Connections

696-725_CH24_868829.indd 724

9/15/05 1:43:12 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Communicating Information The Clothes Horse, a well-known retailer of men’s apparel, is closing. Before it does it wants to collect all its accounts receivable. INSTRUCTIONS Write a collection letter to send to all customers with outstanding balances now and a second letter to send in four weeks.

Transaction Risks International companies strive to collect accounts receivable as quickly as possible. A firm that expects to receive payment in a foreign currency faces a transaction risk that currency values will change to its disadvantage between the time the contract is entered and the time payment is made. INSTRUCTIONS Assume that British Airways purchases airplanes from Boeing, a U.S. manufacturer. Boeing agrees to accept British pounds for the purchase. British Airways takes three months to pay. Describe the transaction risk involved.

Credit Check To obtain credit, you must complete a credit application. The business will check your income, banking record, current debt amount, debt payment record, age, employment history, current employer, address, and so on. PERSONAL FINANCE ACTIVITY Imagine that you just graduated from high school, have a part-time job, and plan to work your way through college. What are some steps you can take to establish a good credit rating? PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 24.

Horizontal Analysis Horizontal analysis compares the same items on a financial statement for two or more accounting periods. For example you might compare the change in accounts receivable from one year to the next. Look at PETsMART’s balance sheet in Appendix F on page A-46. To complete a horizontal analysis, subtract the item’s base year amount (2003) from the current year amount (2004). Then calculate the result as a percentage of the base year amount. The result is the increase or decrease over the base year. Write It Off INSTRUCTIONS Use PETsMART’s balance sheet in All types of companies can Appendix F to complete the following. experience uncollectible 1. Calculate the amount and percentage that accounts receivable. Visit total assets and total stockholders’ equity glencoeaccounting changed from 2003 to 2004. .glencoe.com and click on Student Center. Click on 2. How does horizontal analysis provide WebQuest and select Unit 5 to useful information to a reader of a continue your Internet project. financial statement?

glencoeaccounting.glencoe.com

696-725_CH24_868829.indd 725

C HAPT E R 24

Chapter 24 Real-World Applications and Connections

725

9/15/05 1:43:15 PM

CH A P T ER 2 5

Inventories BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the importance of maintaining accurate inventory records.

2.

Explain the difference between a periodic and a perpetual inventory system.

1. 2. 3. 4.

3.

Take a physical inventory count and record inventories.

4.

Determine the cost of merchandise inventory using the specific identification; first-in, first-out; last-in, firstout; and weighted average cost methods.

5.

6.

7.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business TRACKING INVENTORIES

REI, Inc. Grill some French toast on a camp stove, practice your climbing skills on a 30-foot wall, and then take a spin on a mountain bike. Does this sound like the great outdoors? You

Assign a value to merchandise inventory using the lower-ofcost-or-market rule.

can do all this at your local REI retail store. From cycling shoes

Explain the accounting principles of consistency and conservatism.

How does a retail store like REI keep track of the inventory

to skis, sleeping bags to windbreakers, REI stocks everything you will need for outdoor adventures. at its stores? REI’s computerized software program analyzes which products are selling at specific stores on a day-to-day

▲

Define the accounting terms introduced in this chapter.

basis. The system also tracks what is on order and what is in

Why It’s Important

employees ensure that the right products are purchased and

Merchandise inventory is typically the largest current asset of a business.

What Do You Think?

stock at the distribution center. With this data on hand, REI available to customers at the right stores at the right time.

What might happen if a company like REI could not effectively evaluate which products it should carry in inventory?

726

Chapter 25 Inventories

726-749_CH25_868829.indd 726

9/16/05 12:49:20 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Have you ever noticed a sign on a store that says “Closed for Inventory”? Or gotten a great deal from a special “Pre-Inventory Sale”? At the end of a fiscal period, many businesses physically count items of merchandise they have in stock. Seasonal businesses often perform physical inventory counts after their peak season, when stock on hand tends to be lowest. In this chapter you will learn about several ways to track inventory and assign a value to it at the end of a fiscal period.

glencoeaccounting.glencoe.com

726-749_CH25_868829.indd 727

Personal Connection 1. What kinds of inventory does your workplace carry? 2. How often does your employer take an inventory? 3. Who counts the items?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 25.

727

9/16/05 12:49:26 PM

Determining the Quantity of Inventories

SECTION 1

BEFORE YOU

Maintaining control over inventory is essential. To maintain this control, a business establishes a system of inventory-tracking procedures. A manufacturer controls inventories of raw materials, work in process, and finished goods. Wholesalers and retailers maintain control over merchandise inventory. Can you imagine the problems that a store like WalMart would encounter if it did not have an inventory control system?

READ

Main Idea

Two methods of tracking merchandise are the perpetual inventory system and the periodic inventory system.

Merchandise Inventory How Is Tracking Merchandise Helpful?

Read to Learn…

Earlier you learned that merchandise refers to goods a business purchases for resale to customers. The Merchandise Inventory account shows the cost of goods purchased for resale. By tracking merchandise, a business knows how much merchandise is sold and which items are selling well. Merchandise Inventory is the only account reported on both the balance sheet (as a current asset) and the income statement (to calculate the cost of merchandise sold).

➤ how businesses use

inventory control information. (p. 728) ➤ how businesses keep track of inventory. (p. 728)

Key Terms

Methods of Tracking Inventory

perpetual inventory system point-of-sale terminal (POS) online periodic inventory system

How Do You Keep Track of Inventory? Businesses can choose between two methods to track merchandise: the perpetual inventory system and the periodic inventory system.

Perpetual Inventory System

Figure 25–1 Computer Printout from a Perpetual Inventory System

Stock No.

7651 7560 7762 7785 7208 7338 7193 7525 7937

728

Most large businesses and smaller ones with automated accounting systems use the perpetual inventory system , which keeps a constant, up-to-date record of merchandise on Wilton Outdoor Center hand at any point in time. When a busiDAILY INVENTORY REPORT ness uses a perpetual inventory system, Department 47 October 13, 20-management can obtain the quantity on hand and cost of any item at any point in time. The business can use the Kilmer Rods Each 8 $ 31.80 $ 254.40 Tyon Rods Each 12 36.40 436.80 information to determine when to reorPeterson Rods Each 11 29.75 327.25 der items. This avoids loss of sales due K & R Rods Each 6 26.30 157.80 to inadequate inventory. Figure 25–1 Weber Reels Each 5 35.20 176.00 Pro Reels Each 8 41.40 331.20 shows an example of a computer printArtcraft Reels Each 4 47.10 188.40 out for a perpetual inventory system. #7 Fishing Hook Box 26 4.86 126.36 #9 Fishing Hook Box 31 5.24 162.44 The perpetual inventory system records an entry in the MerchanTotal $ 2,160.65 dise Inventory account every time a Item

Unit

Quantity

Unit

Total

Cost

Value

Chapter 25 Inventories

726-749_CH25_868829.indd 728

9/16/05 12:50:24 PM

purchase or sale occurs. After each sale the system also enters the cost of merchandise sold in the accounting records. The perpetual inventory system uses a Cost of Merchandise Sold account. Computers update a perpetual inventory system through electronic cash registers, or point-of-sale terminals (POS) , that are online (linked to a central computer system). Such machines read bar codes that identify the item being sold. The computer records the sale and automatically updates the inventory information. Merchandise purchases are also entered into the computer to update the inventory records. Businesses that have not yet automated their operations can also use a perpetual inventory system. They use stock cards or sheets like the one in Figure 25–2 to record the amount of increase or decrease for every purchase and sale. For example, a business records the quantity of merchandise purchased in the stock card’s In column and the quantity of sold items in the Out column.

STOCK CARD STOCK NO.

ITEM

C 1297

Altmore Disc Player

SUPPLIER

91246

UNIT

MINIMUM

MAXIMUM

Each

15

60

DATE

EXPLANATION

IN

OUT

7/1/20-- Balance on Hand

BALANCE

48

7/8/20-- Shipping Order 21928

6

7/12/20-- Shipping Order 22201

10

32

7/20/20-- Shipping Order 22456

8

24

7/24/20-- Shipping Order 22719

42

12

12

7/24/20-- Purchase Req. 19426 7/31/20-- Receiving Report 21563

Periodic Inventory System In the periodic inventory system , inventory records are updated only after a physical count of merchandise on hand is made. This system does not adjust inventory records for every purchase and sale. Instead, an adjusting entry is made at the end of the accounting period. See Chapter 18, pages 521–522 for a review of how to calculate the inventory adjustment. Small businesses that maintain manual accounting records generally use this system.

Physical Inventory Count

SUPPLIER’S CATALOGUE NO.

Star Electric

48

60

Figure 25–2 Stock Card Used in a Perpetual Inventory System

AS YOU

READ

In Your Experience Give an example of a store that gave you information regarding an inventory item. Did it use a manual or computer system to obtain the information?

In either inventory tracking system, a business takes a physical count of its merchandise at least once a year. This is called taking inventory and is part of the system of internal controls. Businesses using the periodic inventory system must use the physical count to update their accounting records. The process of identifying and counting all items of merchandise for businesses with many items in inventory is very time consuming. ThereFigure 25–3 Inventory fore, inventory is usually counted when it is at its lowest level. Seasonal Sheet businesses take physical counts and record inventories at the end of the INVENTORY SHEET peak selling period after they have sold 8 DATE Jan. 5, 20-CLERK Arlene Stone PAGE most of the merchandise. A ski shop, STOCK NO. ITEM UNIT QUANTITY UNIT COST TOTAL VALUE for instance, probably takes inventory 1901 Needles Pkg 24 1 14 27 36 in May or June. 2132 Thread Spool 12 65 7 80 The total number of a particular 2136 Thread Spool 18 55 9 90 item on hand is recorded on an inven3245 Zipper Each 18 1 50 27 00 tory card or an inventory sheet. Figure 1917 Pins Box 24 79 18 96 25–3 shows a typical inventory sheet. It 4971 Buttons Pkg 12 89 10 68 lists each item’s stock number, descrip4993 Tape Measure Each 15 1 49 22 35 tion, quantity on hand, unit cost, and 789 14 TOTAL FOR THIS SHEET the total cost of its inventory on hand. Section 1 Determining the Quantity of Inventories

726-749_CH25_868829.indd 729

729

9/16/05 12:50:27 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Identify three facts about each inventory tracking system covered in this section. Create a chart similar to this one.

4RACKING3YSTEM

&ACT

&ACT

&ACT

Do the Math Katie’s Ceramic Emporium received 9 dozen ceramic elephants for a total cost of $306.72. The invoice also includes 17 dozen songbird figurines in various colors, with a cost of $822.12. Based on the information on the invoice, calculate the unit cost of the elephants and the songbirds.

Problem 25–1 Preparing Inventory Reports In your working papers, complete the manual inventory sheet for Carole’s Gift Shop. Use today’s date and your name as the clerk.

730

Stock No.

Item

Unit

Quantity

1790 2217 1900 1201 1205 3495 2722 4200 1907 1742

Greeting Cards Plush Toys Balloons Wrapping Paper Ribbon Novelty Buttons Music Boxes Party Supplies Gift Boxes Vases

Doz. Each Doz. Each Spool Doz. Doz. Doz. Doz. Doz.

32 20 12 30 25 12 6 10 5 2

Unit Cost 6.00 2.50 .50 1.12 .75 2.50 60.00 6.50 2.75 12.50

Chapter 25 Inventories

726-749_CH25_868829.indd 730

9/16/05 12:50:30 PM

SECTION 2

Determining the Cost of Inventories

Once a business determines the quantity of merchandise it has on hand, it calculates the cost of that merchandise. There are four inventory costing methods used to assign costs to merchandise.

Why Is It Difficult to Determine Inventory Costs? When merchandise is purchased, it is recorded in the accounting records at cost. However, assigning a cost to each item in inventory can be complicated. A business may purchase the same item many times within a single inventory period, and the cost may change from one purchase to the next. The challenge is to decide which cost applies to each item.

Methods of Assigning Costs to Inventories Businesses use one of four methods to determine inventory cost: • •

Businesses can choose one of four methods to assign cost values to inventories.

Read to Learn… ➤ why determining

inventory costs can be difficult. (p. 731) ➤ the methods for assigning costs to inventory. (p. 731)

Key Terms

How Do You Set the Cost of Inventory? specific identification first-in, first-out (FIFO)

READ

Main Idea

Inventory Costs

• •

BEFORE YOU

last-in, first-out (LIFO) weighted average cost

The Specific Identification Costing Method

specific identification method first-in, first-out method (FIFO) last-in, first-out method (LIFO) weighted average cost method

Under the specific identification method , the exact cost of each item is determined and assigned to that item. The actual cost of each item is obtained from the invoice. Businesses that sell a small number of items with high unit prices most often use the specific identification method. Appliance stores, automobile dealerships, and furniture stores often use this method. The Entertainment Store uses the periodic inventory system. It started the year with a beginning inventory of 15 DVD players. During the period the store purchased an additional 50 players. When a physical inventory count was taken on May 31, there were 12 players still on hand. The cost of the players was calculated as shown on page 732. Section 2 Determining the Cost of Inventories

726-749_CH25_868829.indd 731

731

9/16/05 12:50:32 PM

Date June 1 Aug. 4 Dec. 8 Feb. 27 May 1

AS YOU

READ

In Your Own Words Specific Identification Costing Explain why all businesses do not use the specific identification costing method.

Description Beginning inventory Purchase Purchase Purchase Purchase Total

Units 15 20 10 10 10 65

Cost $250 250 253 258 260

Total
$ 3,750
5,000
2,530
2,580
2,600 $16,460

Using the specific identification method, the accountant checks the invoices to find the actual cost of each of the 12 players still on hand at the end of May. The accountant found the following:

4 5 3 12

purchased @ $253 each
$1,012 purchased @ $258 each
1,290 purchased @ $260 each
780 players (ending inventory) $3,082

The cost of ending inventory is $3,082. Once the cost of ending inventory has been calculated, the cost of merchandise sold can be computed:

Purchases available for sale  Cost of ending inventory Cost of merchandise sold In this example the cost of merchandise sold using the specific identification method is $13,378:

Cost of players available for sale Less ending inventory Cost of merchandise sold

Units 65 12 53

Cost $16,460 3,082 $13,378

The First-In, First-Out Costing Method The first-in, first-out method (FIFO) of assigning cost assumes that the first items purchased (first in) are the first items sold (first out). The FIFO method assumes that the items purchased most recently are the ones on hand at the end of the period. The physical flow of most merchandise is first-in, first-out. For example, think about milk that is stocked by a supermarket. Since milk is perishable, the supermarket stocks the shelves with the milk it purchased first. As that milk is sold, later purchases of milk are added at the back of the shelves. Let’s apply the FIFO costing method to our DVD player example.

Date June 1 Aug. 4 Dec. 8 Feb. 27 May 1

732

Description Beginning inventory Purchase Purchase Purchase Purchase Total

Units 15 20 10 10 10 65

Cost $250 250 253 258 260








Total $ 3,750 5,000 2,530 2,580 2,600 $16,460

Chapter 25 Inventories

726-749_CH25_868829.indd 732

9/16/05 12:50:37 PM

Under the FIFO method, the items purchased first are assumed to be the items sold first. In other words the 53 players sold are assumed to be as follows:

Beginning inventory Aug. 4 Dec. 8 Feb. 27 Total sold

Units 15 20 10 8 53

The items remaining in inventory are:

Feb. 27 (10 bought 8 sold) May 1 Total

Units 2 10 12

The cost of the ending inventory using the FIFO method is:

10 units @ $260 each 2 units @ $258 each 12 units





$2,600 516 $3,116

The cost of merchandise sold using the FIFO method is $13,344:

Cost of players available for sale Less ending inventory Cost of merchandise sold

Units 65 12 53

$16,460 3,116 $13,344

The Last-In, First-Out Costing Method The last-in, first-out method (LIFO) of assigning inventory cost assumes that the last items purchased (last in) are the first items sold (first out). The LIFO method assumes that the items purchased first are still on hand at the end of the period. The earliest costs, therefore, are the ones used to assign a cost to the inventory. The physical flow of a stone and gravel company is last-in, first-out. When new gravel is purchased and delivered, it is deposited on top of the existing gravel. As gravel is taken from the top of the pile, the first gravel used is the last gravel delivered. Let’s return to the DVD player example and apply the LIFO costing method.

Date June 1 Aug. 4 Dec. 8 Feb. 27 May 1

Description Beginning inventory Purchase Purchase Purchase Purchase Total

Units 15 20 10 10 10 65

Cost $250 250 253 258 260

AS YOU

READ

Compare and Contrast Cost Flow Assumptions How are FIFO and LIFO similar? How are they different?

Total
$ 3,750
5,000
2,530
2,580
2,600 $16,460

Using the LIFO method, the 12 players remaining in stock are from the beginning inventory of 15 units. The cost of the ending inventory is $3,000 (12 units @ $250 each). Section 2 Determining the Cost of Inventories

726-749_CH25_868829.indd 733

733

9/16/05 12:50:38 PM

The cost of merchandise sold using the LIFO method is $13,460:

Connect to…

SCIENCE

How much the human body is worth depends on the method used to value it. Broken down into its basic elements and minerals, it is worth only a few dollars. But when broken down to its valuable fluids, tissues, and germ-fighting antibodies, it is worth $45 million according to a recent Wired article.

Cost of players available for sale Less ending inventory Cost of merchandise sold

Units 65 12 53

$16,460 3,000 $13,460

The Weighted Average Cost Method A fourth method of assigning inventory costs is the weighted average cost method. The weighted average cost method assigns the average cost to each unit in inventory. The average cost is calculated by: • • •

adding the number of units on hand at the beginning of the period and the number of units purchased adding the cost of the units on hand at the beginning of the period and the cost of the units purchased dividing the total cost by the total number of units

The average cost per unit is used to determine the cost of the ending inventory. Again, we will use the The Entertainment Store example to apply the weighted average cost method.

Date June 1 Aug. 4 Dec. 8 Feb. 27 May 1

Description Beginning inventory Purchase Purchase Purchase Purchase Total

Units 15 20 10 10 10 65

Cost $250 250 253 258 260








Total $ 3,750 5,000 2,530 2,580 2,600 $16,460

The average cost per player is $253.23 ($16,460  65 units). The cost of the ending merchandise inventory using the weighted average cost method is $3,038.76 (12 units  $253.23). The cost of merchandise sold using the weighted average cost method is $13,421.24:

Cost of players available for sale Less ending inventory Cost of merchandise sold

Units 65 12 53

$16,460.00 3,038.76 $13,421.24

The following table illustrates the different inventory costing methods for The Entertainment Store’s inventory of DVD players. After the company selects an inventory costing method, it is applied consistently as you will see in the next section. Method Specific identification FIFO LIFO Weighted average

734

Cost of Players Sold $13,378.00 13,344.00 13,460.00 13,421.24

Ending Inventory $3,082.00 3,116.00 3,000.00 3,038.76

Chapter 25 Inventories

726-749_CH25_868829.indd 734

9/16/05 12:50:38 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Identify two facts about each inventory costing method covered in this section. Create a chart similar to this one.

#OSTING-ETHOD

&ACT

&ACT

Do the Math Foxfire Golf Club Pro Shop uses the first-in, first-out method for inventory costing. At the beginning of the year, Foxfire had 30 golf club sets on hand. The golf club sets were purchased for $800 each. An additional 12 golf club sets were purchased during the year at $875 each. When inventory was taken at the end of the season, 5 golf sets were still on hand. Using the FIFO method of inventory valuation, what was the total cost of merchandise sold?

Problem 25–2 Determining Inventory Costs The following items were purchased by Kudos Leather Goods during the month of April: April 2 April 8 April 18 April 26

34 wallets @ $12.95 each 24 wallets @ $13.10 each 15 wallets @ $13.25 each 20 wallets @ $13.27 each

On April 1 the business had in inventory 19 wallets valued at $12.90 each. On April 30 the business had 36 wallets in inventory; of these wallets, 8 were purchased on April 2, 15 were purchased on April 8, 3 were purchased on April 18, and 10 were purchased on April 26.

Instructions In your working papers, calculate the cost of the ending inventory using: a. b. c. d.

the specific identification method the FIFO method the LIFO method the weighted average method Section 2 Determining the Cost of Inventories

726-749_CH25_868829.indd 735

735

9/16/05 12:50:41 PM

Accounting Careers in Focus CHIEF FINANCIAL OFFICER

Water Replenishment District of Southern California, Cerritos, California Scott M. Ota

.. Tips from .

for a job, When looking viideal work en consider your rk o w you want to ronment. Do think because you are an accountant, you must be good at y? small compan for a large or math. That is true, but the key is actually knowing how to important, pay Which is more balance accounts and understanding their relationships. t opportunity? r advancemen o roQ: What key factors are necessary for success? more about p You can learn yers through A: As you move up the corporate ladder, your success will depend spective emplo ucted on the a great deal on how effectively you communicate and relate to research cond r your library o others. When working with nonaccountants, know your audience Internet or at and bring the conversation to their level of understanding. career center.

Q: Why is accounting appealing to you? A: Accounting is like learning a different language. Some people

Q: Do you have any advice for accounting students? A: Don’t get discouraged. If accounting were easy, everyone would do it. Stay on

target and make definite, attainable goals and stick to them. There are so many different careers in accounting—the options are limitless.

Q: What advice would you offer those interested in a career track leading to a chief financial officer position? A: Talk to people in the industry. Investigate the requirements for becoming a CFO to determine whether you are willing to put in the time and effort. The background and experience that you develop over the early part of your career is very important. It will lay the foundation for things to come.

CAREER FACTS ▲ ▲ ▲ ▲ ▲

Nature of the Work: Direct the company’s accounting policies, procedures, and finance functions; ensure the integrity of the company’s financial information; identify and manage business risks and insurance requirements. Training or Education Needed: At least 10 years of experience, including public accounting experience and a minimum of five years in a management role; a master’s degree in business administration. Many companies require a CPA license. Aptitudes, Abilities, and Skills: This is an executive-level position. Strong analytical skills, long-term planning skills, and communication skills are required. CFOs work directly with a company’s chief executive officer, board members, and other senior executives. Salary Range: $85,000 to $350,000 depending on experience, location, and company revenue. Career Path: Gain experience in a public accounting firm and then accept positions of increasing responsibility in a corporate environment, such as director of finance, director of accounting, or controller.

Thinking Critically 736

What qualities do you think are important to be a good manager?

Chapter 25 Accounting Careers in Focus

726-749_CH25_868829.indd 736

9/16/05 12:50:48 PM

SECTION 3

Choosing an Inventory Costing Method

A business may use any one of the four inventory costing methods. Careful consideration is given to this choice because it affects the gross profit reported by the business.

Consistency and Inventory Costing How Do You Apply the Consistency Principle? When a business applies the same accounting methods in the same way from one period to the next, the business is applying the GAAP consistency principle . Once a business chooses an inventory costing method, the business must use it consistently. This helps owners and creditors compare financial reports from one period to another. Businesses are permitted to change costing methods but must declare the reasons for changing and how the change will affect the financial statements. In addition the business must get permission for the change from the Internal Revenue Service.

Comparison of the Four Inventory Costing Methods How Does the Inventory Costing Method Affect the Reported Gross Profit? When deciding which inventory costing method to use, the owner or manager compares the four methods and selects the one that is likely to be the most beneficial to the company. The owner or manager considers the present economic conditions and the future economic outlook. He or she will also consider whether prices and demand for the product will remain stable, increase, or decrease. The cost of ending inventory affects the cost of merchandise sold, which in turn affects the income or loss reported on the income statement. The following table compares The Entertainment Store’s gross profit on sales using the four inventory costing methods. The company sold all of the DVD players for $320 each. Total sales are $16,960 (53 units  $320).

Sales Less: Cost of merchandise sold Gross profit on sales

Specific Identification $16,960.00

First-In, First-Out $16,960.00

Last-In, First-Out $16,960.00

Weighted Average $16,960.00

13,378.00

13,344.00

13,460.00

13,421.24

$ 3,582.00

$ 3,616.00

$ 3,500.00

$ 3,538.76

BEFORE YOU

READ

Main Idea

Apply consistency and conservatism when reporting merchandise inventory on the financial statements.

Read to Learn… ➤ about the consistency

principle and inventory costing methods. (p. 737) ➤ how the inventory costing method affects the reported gross profit. (p. 737) ➤ about the conservatism principle and the lowerof-cost-or-market rule. (p. 738)

Key Terms

consistency principle lower-of-cost-or-market rule market value conservatism principle

AS YOU

READ

Instant Recall Income Statement

Sales
Cost of merchandise sold Gross profit on sales
Operating expenses Net income (loss)

Section 3 Choosing an Inventory Costing Method

726-749_CH25_868829.indd 737

737

9/16/05 12:50:51 PM

AS YOU

READ

Key Point The Effect of Inventory Costing on Net Income A company’s gross profit on sales and net income are affected by the inventory costing method used.

Over the year, the price that The Entertainment Store paid to purchase each player increased from $250 to $260. As the table on page 737 shows, in a period of rising prices, the LIFO method results in the lowest gross profit on sales. The FIFO method results in the highest gross profit on sales. Businesses pay income taxes on income earned. As this example indicates, the inventory costing method used by a business can increase or decrease its taxes.

Conservatism and the Lower-of-Cost-or-Market Rule How Do You Apply the Conservatism Principle?

AS YOU

READ

It’s Not What It Seems Market Value For inventory purposes, market value is not the retail price you pay at the store for an item. It is the wholesale price a store would pay a supplier to replace that item.

Merchandise inventory appears the income statement and the balance sheet. Cost is the most common basis for reporting inventory. However, inventory might be worth less than its cost. For example, some merchandise items may deteriorate or become obsolete. If their value becomes less than the recorded cost, the difference is a loss to the business. The lower-of-cost-or-market rule requires that the cost of the ending inventory that appears on the financial statements is the lower of its cost (calculated using one of the four inventory methods) or its market value. Market value of an item is the current price that is charged for a similar item of merchandise in the market. That is, it is the price that a retailer like The Entertainment Store would pay a wholesaler or manufacturer for a specific item. Market value is the cost at which the inventory item could be replaced at the date of the financial statements. Let’s look at an example. Assume that The Entertainment Store determines that the current market value of the DVD players is $248 each. At market the players are worth $2,976 ($248  12 units). Assume also that The Entertainment Store uses the FIFO inventory costing method. Under this method the cost of the ending inventory was $3,116. Following the lower-of-cost-or-market rule, The Entertainment Store will report inventory at $2,976. Lower of Cost (FIFO) or Market

$3,116 2,976

The GAAP conservatism principle of accounting states that it is best to present amounts that are least likely to result in an overstatement of income or assets. To be conservative is to take the safe route. The lower-of-cost-ormarket rule is conservative for two reasons: 1. Decreases in inventory value (losses) are recognized when they occur, but increases in inventory value are not recorded. 2. Inventory as reported on the balance sheet is never more, but may be less, than the actual cost of the inventory.

738

Chapter 25 Inventories

726-749_CH25_868829.indd 738

9/16/05 12:50:57 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a chart like this one to describe the two accounting principles covered in this section. Also describe how each principle applies to merchandise inventory.

!CCOUNTING0RINCIPLE

$ESCRIPTION

Do the Math The management of Baby Steps Children’s Store wants to report the largest gross profit on sales. Using the graph, compare the gross profit on sales for the four inventory costing methods. Which method results in the largest gross profit on sales?

!PPLICATIONTO)NVENTORY

Gross Profit Weighted average Last-in, first-out First-in, first-out Specific identification 119,500 120,000 120,500 121,000 121,500 122,000

Problem 25–3 Analyzing a Source Document Read the following memorandum and complete the assigned task. MEMORANDUM

Toys & Things TO: FROM: DATE: SUBJECT:

Accounting Clerk Accounting Manager June 30, 20-Change in Inventory Method

We have received approval to change from the LIFO to the FIFO method of determining our inventory costs. Please calculate the cost of the Walk-ALong Dolls using the FIFO method. There are 36 dolls in inventory. Walk-A-Long Dolls

Beginning inventory Purchases 6/11 6/17 6/22

8@ $15.45 12@ $15.95 10@ $16.25 6@ $16.40

Instructions 1. What is the new value of the ending inventory? 2. Assume that all 36 dolls were sold for $21.95. What is the gross profit for this item?

Section 3 Choosing an Inventory Costing Method

726-749_CH25_868829.indd 739

739

9/16/05 12:50:59 PM

CH A P T ER 2 5

Summary

Key Concepts 1. Merchandise inventory is often the largest current asset of a business. Merchandise Inventory is the only account that appears on both the balance sheet and the income statement: • as a current asset on the balance sheet • as part of the calculation for cost of merchandise sold on the income statement To control its merchandise, a merchandising business establishes a system of inventory procedures that identifies: • how much of its merchandise has been sold • which items are selling well • which items should not be replaced after they are sold 2. Differences between a periodic and perpetual inventory system:

Periodic Inventory System

Perpetual Inventory System

Used by small businesses with manual accounting records.

Used by most large businesses and smaller ones with automated accounting systems.

Requires a physical count of the merchandise on hand to update inventory records.

Provides current inventory records at any point in time.

How inventory accounting records are updated: • An adjusting entry is made to the Merchandise Inventory account at the end of the accounting period. (To review this, see Chapter 18, pages 521–522.) • The cost of merchandise sold is calculated at the end of the accounting period (To review this, see Chapter 19, page 559.)

How inventory accounting records are updated: • When a sale is made, the decrease to inventory is handled electronically using point of sale terminals that scan in the product’s bar code. • When merchandise is purchased, the increase to inventory is entered directly into the inventory system.

3. At least once a year, a business takes inventory by physically counting its merchandise. This is a good practice for all merchandisers, regardless of the inventory tracking system used. The count is usually made when inventory is at its lowest level, generally after a company’s peak selling period. An inventory card or inventory sheet is used to record the following information about each item at a particular date: • • • • •

740

stock number item name unit description quantity on hand unit cost

Chapter 25 Summary

726-749_CH25_868829.indd 740

9/16/05 12:51:04 PM

Summary

CHAPT E R 25

4. Businesses choose one of four methods to assign costs to the merchandise that it has on hand. A company’s gross profit on sales and net income are affected by the inventory costing method it uses. Inventory Costing Methods: Specific identification method

Tracks the exact cost of each item.

First-in, first-out method (FIFO)

Assumes that the first items purchased are the first items sold.

Last-in, first-out method (LIFO)

Assumes that the last items purchased are the first items sold.

Weighted average cost method

Uses an average cost for each inventory item.

5. The lower-of-cost-or-market rule applies the conservatism principle to reporting inventory on financial statements. It requires a business to report its ending inventory using whichever of these two is lower: • the inventory’s cost as calculated using the costing method selected by the company (specific identification method, FIFO, LIFO, or weighted average method) • the inventory’s market value, which is the wholesale cost to replace the inventory at the date of the financial statements 6. In reporting its inventory, a business must follow two accounting principles: • Consistency This principle requires that once a business chooses an inventory costing method, it must use that method consistently. If it changes methods, it must obtain permission from the Internal Revenue Service and then report the reasons for the change and how it affects the financial statements. • Conservatism This accounting principle requires that when they can choose among procedures, accountants must choose the safer, or more conservative, route by presenting amounts that are least likely to result in an overstatement of income or assets.

Key Terms conservatism principle

(p. 738)

online

(p. 729)

consistency principle

(p. 737)

periodic inventory system

(p. 729)

first-in, first-out method (FIFO)

(p. 732)

perpetual inventory system

(p. 728)

last-in, first-out method (LIFO)

(p. 733)

point-of-sale terminal (POS)

(p. 729)

lower-of-cost-or-market rule

(p. 738)

specific identification method

(p. 731)

market value

(p. 738)

weighted average cost method

(p. 734)

Chapter 25 Summary

726-749_CH25_868829.indd 741

741

9/16/05 12:51:06 PM

C H A P T ER 2 5 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Inventory Records a. Why does a company need a control system for its merchandise inventory? b. What information does tracking inventory provide to a business? Inventory Tracking Systems a. What is the difference between a periodic and a perpetual inventory system? b. What is the advantage to using a perpetual inventory system? Why is it difficult for some businesses to use it? Physical Inventory Count a. When is the best time for a business to take a physical inventory? b. Which tracking system requires a physical inventory count for financial reporting purposes? Inventory Costing Methods a. What is meant by the phrase “with the FIFO method, the inventory cost is based on the most recent costs”? b. Why does the inventory costing method used affect gross profit on sales and net income? Lower-of-Cost-or-Market Rule a. In this rule, what is meant by the term cost? By the term market? b. State the lower-of-cost-or-market rule using your definitions of cost and market. Consistency and Conservatism a. How does the consistency principle help the owners, creditors, and the general public? b. What approach to presenting income does the conservatism principle require?

Apply Key Terms Grandma’s Toy Attic is changing from a manual to an automated inventory control system. As the owner, you plan to hire an inventory supervisor who understands accounting principles, inventory control, and business economics as well as computer applications. Use the following terms to write a job description for this position. Then write a newspaper advertisement to attract the most qualified individual. Suggest some layout ideas for the advertisement. conservatism principle consistency principle first-in, first-out method (FIFO) last-in, first-out method (LIFO) lower-of-cost-or-market rule

742

market value online periodic inventory system perpetual inventory system point-of-sale terminal (POS) specific identification method weighted average cost method

Chapter 25 Review and Activities

726-749_CH25_868829.indd 742

9/16/05 12:51:09 PM

Computerized Accounting CHAPT E R 25 Inventory Costing Making the Transition from a Manual to a Computerized System Task Determining the cost of inventories in a perpetual inventory system

Manual Methods • Enter purchases of merchandise onto stock cards. • Enter sales of items onto stock cards. • At period end, calculate the number and value of remaining inventory items.

Computerized Methods • When the accounting system is set up, the costing method must be determined. • Purchases of merchandise update not only the general ledger but also update the inventory records. • As sales are made, the system updates the inventory records. • Inventory quantities and values are available when needed.

Q&A Peachtree Question

Answer

How is inventory set up and tracked in Peachtree?

1. From the Maintain menu, select Default Information. 2. Select Inventory Items. 3. Click the GL Accts/Costing tab and enter the GL account numbers for sales and purchases. 4. Click the Taxes/Shipping tab and enter a (✓) if sales taxes are to be collected on items sold. Click OK. 5. From the Maintain menu, select Inventory Items. 6. Enter Item ID codes, descriptions, price, and cost method (FIFO, LIFO, or Average) for all inventory items. 7. When recording sales or purchases of inventory items, use the established item codes. With each transaction, the system will update the inventory records.

QuickBooks Q & A QuickBooks Question How is inventory set up and tracked in QuickBooks?

Answer 1. 2. 3. 4. 5. 6.

From the Lists menu, select Item List. Click the Item drop-down menu, and choose New. From the Type field, choose Inventory Part. Complete the Purchase, Sales, and Inventory Information sections. Click OK. When recording sales, purchases, or returns of inventory, use the established item codes. QuickBooks will automatically update the inventory records.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 25 Computerized Accounting

726-749_CH25_868829.indd 743

743

9/16/05 12:51:17 PM

Problems

C H A P T ER 2 5 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 25–4 1. Select the problem set for Sunset Surfwear. 2. Rename the company and set the system date. 3. Print an Inventory Valuation Report, Cost of Goods Sold Journal, and Item Costing Report. 4. Complete the Analyze activity. 5. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 25–4 1. Restore the Problem 25-4.QBB file. 2. Print an Inventory Valuation Detail report. 3. Complete the Analyze activity. 4. Back up your work.

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 25–6 1. Select the spreadsheet template for Problem 25–6. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

744

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 25–4 Calculating the Cost of Ending Inventory Sunset Surfwear sells wet suits. On January 2 there were 21 wet suits at a total cost of $4,809 in inventory.

Date Jan. 2 Jan. 3 Mar. 17 July 27 Sept. 27 Nov. 29

Description Beginning inventory Purchase Purchase Purchase Purchase Purchase Total

Wet Suits 21 10 6 12 10 6 65

Cost $229 235 238 240 241 244

Total $ 4,809 2,350 1,428 2,880 2,410 1,464 $15,341

At the end of the year, there were 17 wet suits in ending inventory. Of these, 1 was purchased on July 27, 10 were purchased on September 27, and 6 were purchased on November 29.

Instructions Assign a cost to the ending inventory using the following: a. b. c. d.

the specific identification method the FIFO method the LIFO method the weighted average cost method

Analyze

Determine which inventory method resulted in the lowest cost of ending inventory.

Problem 25–5 Completing an Inventory Sheet InBeat CD Shop assigns a cost to its inventory using the lower-of-cost-ormarket rule. In your working papers, there is a partial inventory record. As an example, the first line of the inventory record has been completed. INVENTORY RECORD Current Item No.

0247

Item

Blank CDs

Ending

Cost

Inventory

per Unit

24

2.67

Market Value

2.88

Price to

Total

be Used

Cost

2.67

64.08

Chapter 25 Problems

726-749_CH25_868829.indd 744

9/16/05 12:51:19 PM

Problems

CHAPT E R 25

Instructions Complete the inventory record. Do the following: 1. Select the lower-of-cost-or-market value. Enter that amount in the Price to be Used column. 2. Calculate the total cost of each item by multiplying the units in ending inventory by the Price to be Used column. 3. Add the amounts in the Total Cost column to determine the total cost of the ending inventory.

Analyze

Identify how many items used market value rather than actual cost.

Problem 25–6 Calculating Gross Profit on Sales Using the four inventory costing methods, Shutterbug Cameras summarized the cost of its ending inventory as follows: Specific Identification $21,476.00

First-In, First-Out $21,581.40

Last-In, First-Out $21,410.93

Weighted Average Cost $21,447.36

Shutterbug Cameras also reported the following amounts: Net sales $53,874.92 Purchases available for sale 57,621.31

Instructions Using the preceding information, determine the cost of merchandise sold and the gross profit on sales for each of the inventory costing methods.

Analyze

Conclude which method resulted in the largest gross profit on sales.

Problem 25–7 Reporting Ending Inventory on the Income Statement Cycle Tech Bicycles operates on a fiscal year beginning January 1. At the beginning of the year, the shop had in stock six Model #8274, 10-speed bicycles, valued at $2,364 (6 bicycles @ $394 each). During the year the business made the following purchases:

Date Jan. 20 Mar. 5 Apr. 23 Aug. 14 Oct. 3 Nov. 17 Total Purchases

Bicycles 4 5 7 4 6 3 29

Cost $399 415 419 423 430 435

Total  $ 1,596  2,075  2,933  1,692  2,580  1,305 $12,181

There were seven bicycles in inventory at the end of the period. During the year the bicycles sold for $675 each.

SMART GUIDE Step–by–Step Instructions: Problem 25–7 1. Select the problem set for Cycle Tech Bicycles. 2. Rename the company and set the system date. 3. Print an Inventory Valuation Report, Cost of Goods Sold Journal, and Item Costing Report. 4. Print an Income Statement and a Balance Sheet. 5. Complete the Analyze activity. 6. End the session.

SMART GUIDE Step–by–Step Instructions: Problem 25–8 1. Select the problem set for Buzz Newsstand. 2. Rename the company and set the system date. 3. Record all purchases transactions using the Purchases/Receive Inventory option. 4. Record the transportation charges using the Payments option. 5. Record the camera sales using the Receipts option. 6. Print a Purchases Journal, Cash Disbursements Journal, and a Cash Receipts Journal to proof your work. 7. Print an Inventory Valuation Report, Cost of Goods Sold Journal, and Item Costing Report. 8. Print an Income Statement. 9. Complete the Analyze activity. 10. End the session.

CONTINUE Chapter 25 Problems

726-749_CH25_868829.indd 745

745

4/6/06 6:42:38 PM

Problems

C H A P T ER 2 5 Instructions

1. Calculate the cost of the ending inventory using the FIFO, LIFO, and weighted average cost methods. 2. Using the costs calculated in (1), determine the cost of merchandise sold for each inventory costing method. 3. Prepare a partial income statement for each inventory costing method showing sales and the calculation of gross profit on sales. Assume that the sales and purchases are net amounts.

Analyze

SOURCE DOCUMENT PROBLEM

Identify the method that resulted in the lowest cost of merchandise sold.

Problem 25–8 Calculating Cost of Merchandise Sold and Gross Profit on Sales

CHALLENGE PROBLEM

Problem 25–8 Use the source documents in your working papers to complete this problem.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 25–8 1. Restore the Problem 25-8.QBB file. 2. Record all purchase transactions using the Enter Bills option. 3. Record the transportation charges using the Write Checks option. 4. Record the camera sales using the Enter Sales Receipts option. 5. Print an Inventory Valuation Detail, a Journal report, and a Profit & Loss report. 6. Complete the Analyze activity. 7. Back up your work.

Buzz Newsstand started the month of May with the following inventory of disposable cameras: Units on Stock No. Brand Hand Unit Cost Selling Price 3845 Lenox 4 $9.60 $ 17.95 4931 Lancaster 6 8.40 17.29 9265 Paterson 3 8.10 16.88 4850 McMahon 5 7.60 15.95 Buzz Newsstand uses the FIFO method to calculate the cost of its merchandise inventory. The May 31 physical inventory count indicated: Lenox Lancaster

Paterson 7 cameras McMahon 5 cameras

Instructions 1. How many units of each of the four cameras were sold during May? 2. Using the chart provided in your working papers, calculate the gross profit on sales for each type of camera. Date

May

Transactions

2 Purchased 10 Lancaster cameras at $8.45 each. 4 Purchased 5 McMahon cameras at $7.80 each. 9 Purchased 6 Lenox cameras at $9.95 each plus a $4 transportation charge. 14 Purchased 5 Paterson cameras at $8.25 each. 17 Purchased 8 Lancaster cameras at $8.60 each. 19 Purchased 4 Lenox cameras at $10.10 each plus a $5 transportation charge. 27 Purchased 8 Paterson cameras at $8.30 each. 29 Purchased 4 Lancaster cameras at $8.85 each.

Analyze 746

4 cameras 5 cameras

Conclude which camera sold the most number of units.

Chapter 25 Problems

726-749_CH25_868829.indd 746

4/6/06 6:42:39 PM

Winning Competitive Events

CHAPT E R 25

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. The inventory system in which a constant, up-to-date record of merchandise on hand is maintained is called the a. first-in, first-out system. c. perpetual inventory system. b. last-in, first-out system. d. periodic inventory system. Use the following information to answer questions 2–4. Johnson, Inc. had the following inventory data: Inventory item T25 had 1,600 units at a unit price of $14 in inventory on January 1. The first purchase during the year was for 1,000 units at $15. The second purchase was for 1,000 units at $18. The December 31 inventory consisted of 1,200 units. The market price is $15. 2. The total cost of the ending inventory using FIFO is a. $16,800. c. $18,468. b. $18,000. d. $21,000. 3. The weighted average unit price is a. $14.50. c. $15.67. b. $15.39. d. $16.00. 4. Assume the weighted average cost method is used. Calculate the ending inventory using the lower-of-cost-or-market rule. a. $16,000 c. $18,468 b. $18,000 d. $21,000

Business Professionals of America MULTIPLE CHOICE 5. FIFO a. Assumes that old goods are sold first and that goods which are on hand are valued at current prices. b. Assumes that new goods are sold first and inventory is valued at old prices. c. Assumes that the cost of current inventory at the conclusion of a period and the cost of goods sold is the overall representation of all the costs that were incurred during this period. d. Assumes that amounts charged Need More Help? as expenses are actual cost of goods sold. Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 25. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

726-749_CH25_868829.indd 747

Chapter 25 Winning Competitive Events

747

4/6/06 6:42:41 PM

C H A P T ER 2 5 Critical Thinking

Inventories

CASE

Merchandising Business: Home Building and Supply

a mattoefr

))

STUDY

ETHICS

$ )) Communicating ACCOUNTING

748

Real-World Applications and Connections

1. Name and describe the two systems used to determine the quantity of merchandise on hand. 2. Explain what is meant by an inventory system that is online. 3. Compute the cost of merchandise sold if the cost of the ending inventory is $35,280 and the cost of the merchandise available for sale is $97,200. 4. Explain why the specific identification costing method is the most accurate in determining inventory cost. 5. Explain why an ice cream stand would not use the LIFO method of inventory costing. 6. Defend the practice of most businesses to estimate the cost of their inventory using a method other than specific identification, which is the most accurate. Remodeling a kitchen? Adding a deck to your home? Home Helper is a building supply store that sells everything from lightbulbs to lumber, cabinet fixtures to appliances. Because it stocks many sizes and varieties of building products, the store has a huge inventory. You work for a local CPA firm hired to evaluate the store’s inventory procedures. The store manager wants to make sure the store is using the most appropriate inventory costing method. INSTRUCTIONS Think about the types of products stocked by such a store. Of the four inventory costing methods you studied in this chapter, recommend the best method for Home Helper. Assume that costs are expected to remain stable over the next few years. Explain the reasons for your recommendation.

Keeping Promotional Items Imagine that you work in the cosmetics department of a large department store like Macy’s. You have access to free samples—shampoo, moisturizer, lipstick, and nail polish—offered by manufacturers to get customers to try their products. This is great! You will never have to buy these products again. You figure that by using them, you are helping to promote them. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Inventory Systems Natural Wonder offers products organically grown or made from organic materials. Its products include clothing, jewelry, gardening materials, and hair and body care products. The store is interested in a system that will keep an accurate count of inventory. Discuss the different inventory systems and explain how frequently each system is updated.

Chapter 25 Real-World Applications and Connections

726-749_CH25_868829.indd 748

9/16/05 12:51:25 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 25

Selecting Equipment and Tools Your manager, Richard Smythe, is considering switching from a manual inventory system to an automated perpetual system. Write a proposal to Mr. Smythe that emphasizes the benefits of a perpetual inventory system. Specifically address time savings and revenue possibilities.

Inventory Measurement Many countries use International Accounting Standards (IAS) as their national GAAP. IAS No. 2 allows inventory valuation using the specific identification, FIFO, and weighted average methods. It does not allow the LIFO method although countries such as the United States, Japan, and Mexico permit its use. INSTRUCTIONS Explain why you think IAS do not permit the use of LIFO.

Inventory Value When shopping for a vehicle, you probably want a wide selection from which to choose. For this reason dealers try to have a large inventory, yet not so large it becomes impossible to track and control. PERSONAL FINANCE ACTIVITY Businesses often cannot estimate the cost of their inventory merely by looking. To understand why, choose a room at your school and estimate the cost of its entire contents. Next, individually list all the large items in the room and estimate the cost of each, then total them. How do the two estimates compare? PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 25.

Inventory Levels Knowing how much inventory is on hand helps managers make decisions about how much merchandise to purchase. Too much inventory means the business has not sold what it purchased and its money is tied up in inventory. A business that holds too little inventory may run out often and need to make frequent purchases which increases costs. It also can lose business when customers go to a competitor to purchase an out-of-stock item. Higher costs and out-of-stock situations mean lower profits. Tracking and Costing INSTRUCTIONS Use PETsMART’s balance sheet Some businesses store and Dear Fellow Stockholders letter in Appendix F inventory in warehouses. Visit to answer the following questions. glencoeaccounting 1. How did PETsMART’s merchandise .glencoe.com and click inventory change from 2003 to 2004? on Student Center. Click on WebQuest and select Unit 5 to 2. What could have caused this change? continue your Internet project.

glencoeaccounting.glencoe.com

726-749_CH25_868829.indd 749

Chapter 25 Real-World Applications and Connections

749

9/16/05 12:51:28 PM

CH A P T ER 2 6

Notes Payable and Receivable BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain how businesses use promissory notes.

2.

Calculate and record notes payable and notes receivable.

1. 2. 3. 4.

3.

Explain the difference between interest-bearing and non-interest-bearing notes.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business

4.

Journalize transactions involving notes payable.

5.

Journalize transactions involving notes receivable.

Advanced Micro Devices

Define the accounting terms introduced in this chapter.

of Advanced Micro Devices (AMD), his work was cut out

Why It’s Important

down. From his start in a research lab at Texas Instruments to

Businesses often borrow and lend money.

was known for profitable operations in the ever-changing

6.

EVALUATING NOTES When Hector Ruiz took over as Chief Executive Officer for him. Competition from Intel was fierce, and sales were

▲

president of Motorola’s Semiconductor Products Sector, Ruiz semiconductor industry. Believing the time was right for expansion, Ruiz began building AMD’s newest “fab” (manufacturing facility) in Dresden, Germany. Fab 36 was expected to cost $2.4 billion over four years. Companies like AMD often issue notes for cash needs. Fab 36’s funding is from bank loans, grants from the Federal Republic of Germany, and company equity.

What Do You Think? When a bank loans money to a company like Advanced Micro Devices, what factors do you think it considers?

750

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 750

4/6/06 6:37:51 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Have you or your parents ever bought a new or used car? Chances are you made a down payment and then signed a note payable for the rest of the purchase price. When businesses buy costly items, such as manufacturing equipment or even an office building, they also sign a note payable. In this chapter you will learn how to calculate the interest on a business note and record the total amount payable.

glencoeaccounting.glencoe.com

750-777_CH26_868829.indd 751

Personal Connection Have you noticed any items that your employer purchased that required signing a note payable? This could include purchases like equipment, buildings, vehicles, or land.

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 26.

751

9/15/05 1:56:27 PM

Promissory Notes

SECTION 1

BEFORE YOU

Many people sign a note to pay for the purchase of a vehicle over a certain period of time. The note may be with a company like Ford Motor Credit or a financial institution. In this chapter you will learn about notes payable and notes receivable.

READ

Main Idea

The formula for calculating interest is Principal  Interest Rate  Time.

A Promise to Pay

Read to Learn…

What Is a Promissory Note?

➤ how promissory notes are used. (p. 752) ➤ how to calculate the interest on a note

A promissory note , often shortened to note, is a written promise to pay a certain amount of money at a specific time. Promissory notes are formal documents that are evidence of credit granted or received. Laws require a promissory note to contain certain information as shown in Figure 26–1.

(p. 754)

Key Terms promissory note note payable note receivable principal face value term issue date

payee interest rate maturity date maker interest maturity value

Notes Payable and Notes Receivable A note payable is a promissory note that a business issues to a creditor when it borrows or buys on credit. A note receivable is a promissory note that a business accepts from a credit customer.

Principal or Face Value— amount being borrowed

Term of note—amount of time the borrower has to repay the note

Issue Date—date on which a note is written

42

NOTE

$ 2,500.00

Date

Ninety days Payee—person or business to which payment will be made

Sept. 14

after date I promise to pay to

Athletic Equipment Inc. Two thousand five hundred dollars 11.5% Due date

Interest Rate—fee charged for use of money; stated as a percentage of the principal

20 --

the sum of with interest at the rate of

per year.

December 13, 20--

Michael Brown Maturity Date—due date of the note

Maker—the person or business promising to repay the principal and interest

Figure 26–1 Promissory Note 752

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 752

4/6/06 6:38:06 PM

The Maturity Date of a Note When a note is signed, the maker of the note agrees to repay the amount of the note within a certain period of time, usually stated in days, months, or years. This time period is the term of the note. Both the term and the issue date (date on which the note is signed) are needed to determine the maturity date (due date) of a note. In the note in Figure 26–1, Michael Brown, manager of On Your Mark Athletic Wear, agreed to pay Athletic Equipment Inc. the principal plus interest 90 days from September 14. To determine the maturity date: 1. Determine the number of days remaining in the month in which the note is issued. No interest is charged for the issue date, so subtract the date of the note from the number of days in the month. 2. Determine the number of days remaining after the first month. To do this subtract the number of days calculated in Step 1 from the term of the note.

30 days in September 14 days issue date is September 14 16 days

READ

Key Point Number of Days in Months January, March, May, July, August, October, and December have 31 days. April, June, September, and November have 30 days. February has 28 days (29 days in a leap year).

90 days term of note 16 days in September ➛ 74 days remaining

3. Subtract the number of days in the next month (October) from the number of days remaining after Step 2.

➛ 74 days

4. Subtract the number of days in the next month (November) from the days remaining after Step 3.

➛ 43 days

5. Since there are only 13 days remaining, the due date is 13 days into the next month (December).

AS YOU

31 days in October 43 days remaining

30 days in November 13 days remaining

AS YOU

READ

In Your Own Words The due date for this note is December 13.

Some businesses and banks use time calendars to calculate a note’s maturity date. Figure 26–2 on page 754 shows an example of a time calendar. The time calendar has two sets of days: (1) the day of the month (left and right columns), and (2) the day of the year, by month (middle column). To calculate a maturity date using the time calendar, follow these steps:

Maker and Payee Explain who the maker and the payee of a note are.

1. Locate the issue date of the note (for example, 14) in the Day of month column. Move across the month columns to the issue month (September). In our example September 14 is the 257th day of the year. 2. Add the number of days in the term of the note (90) to the day of the year. The sum of the two numbers is 347 (257  90). 3. Find the number 347 in the month columns. The 347th day of the year is in December. The maturity month is December. Move across to the Day of month column. The 347th day of the year corresponds to the 13th day of the month. The due date of the note is December 13. Section 1 Promissory Notes

750-777_CH26_868829.indd 753

753

9/15/05 1:57:53 PM

Day of month

Day of month

Figure 26–2 Time Calendar

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

1 2 3 4 5

1 2 3 4 5

32 33 34 35 36

60 61 62 63 64

91 92 93 94 95

121 122 123 124 125

152 153 154 155 156

182 183 184 185 186

213 214 215 216 217

244 245 246 247 248

274 275 276 277 278

305 306 307 308 309

335 336 337 338 339

1 2 3 4 5

6 7 8 9 10

6 7 8 9 10

37 38 39 40 41

65 66 67 68 69

96 97 98 99 100

126 127 128 129 130

157 158 159 160 161

187 188 189 190 191

218 219 220 221 222

249 250 251 252 253

279 280 281 282 283

310 311 312 313 314

340 341 342 343 344

6 7 8 9 10

11 12 13 14 15

11 12 13 14 15

42 43 44 45 46

70 71 72 73 74

101 102 103 104 105

131 132 133 134 135

162 163 164 165 166

192 193 194 195 196

223 224 225 226 227

254 255 256 257 258

284 285 286 287 288

315 316 317 318 319

345 346 347 348 349

11 12 13 14 15

16 17 18 19 20

16 17 18 19 20

47 48 49 50 51

75 76 77 78 79

106 107 108 109 110

136 137 138 139 140

167 168 169 170 171

197 198 199 200 201

228 229 230 231 232

259 260 261 262 263

289 290 291 292 293

320 321 322 323 324

350 351 352 353 354

16 17 18 19 20

21 22 23 24 25

21 22 23 24 25

52 53 54 55 56

80 81 82 83 84

111 112 113 114 115

141 142 143 144 145

172 173 174 175 176

202 203 204 205 206

233 234 235 236 237

264 265 266 267 268

294 295 296 297 298

325 326 327 328 329

355 356 357 358 359

21 22 23 24 25

26 27 28 29 30 31

26 27 28 29 30 31

57 58 59 ... ... ...

85 86 87 88 89 90

116 117 118 119 120 ...

146 147 148 149 150 151

177 178 179 180 181 ...

207 208 209 210 211 212

238 239 240 241 242 243

269 270 271 272 273 ...

299 300 301 302 303 304

330 331 332 333 334 ...

360 361 362 363 364 365

26 27 28 29 30 31

NOTE: For leap years, after February 28, the number of the day is one greater than that given in the table.

Calculation of Interest on a Note How Do You Calculate Interest on a Note?

Connect to…

ECONOMICS

Napoleon created the Bank of France in 1800 to control inflation and high prices. He required every citizen to pay taxes. The government used the taxes to make loans to businesses, which created jobs for the middle class. This policy made Napolean popular.

754

Interest is the fee charged for the use of money. The interest rate is the interest stated as a percentage of the principal. The interest on a promissory note is based on three factors: principal, interest rate, and term of the note.

Calculating Interest Using a Formula The formula used to calculate interest follows:

Interest
Principal  Interest Rate  Time Interest rates are usually stated on an annual basis, that is, on a borrowing period of one year. To find the interest on a one-year promissory note, multiply the principal by the interest rate. The interest on an 11.5%, one-year $2,500 promissory note is $287.50 ($2,500
.115  $287.50). If the term of a promissory note is less than one year, the time in the calculation is expressed as a fraction of one year. The fraction may be stated in days or months. For example, on September 14 On Your Mark signed a note for $2,500 at 11.5% interest for 90 days. Since the term

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 754

9/15/05 1:57:56 PM

of the note is expressed in days, 365 days is used as the denominator of the time fraction. The interest is calculated as follows:

The interest on the note shown in Figure 26–1 on page 752 is $70.89. On the maturity date, On Your Mark will repay the maturity value of the note. Maturity value is the amount due at the due date. In our example the maturity value is $2,570.89 ($2,500.00  $70.89). If the term of this note had been three months instead of 90 days, the denominator of the time fraction would be 12. The interest would be calculated as follows:

Time 3/12

READ

Key Point

Principal  Interest Rate  Time
Interest $2,500  .115  90/365
$70.89

Principal  Interest Rate  .115  $2,500 

AS YOU

Interest Rates Interest rates are stated for a period of one year. To calculate interest on a note signed for a period of less than one year, express the term of the note as a fraction of one year.


Interest
$71.88

The maturity value would be $2,571.88 ($2,500.00  $71.88).

Calculating Interest Using an Interest Table To calculate interest, businesses and banks often use an interest table similar to the one in Figure 26–3. We use On Your Mark’s note to illustrate. • •

• •

Find the term of the note in the Day column, 90. Follow the row across until you reach the column for the interest rate, 11.5%. Where the Day row and the Interest column meet is a factor, 2.835616. The factor is based on a principal amount of $100. Divide the principal of the note by 100. The result is 25 ($2,500  100). Multiply the result by the factor to find the interest. The interest is $70.89 (25
2.835616).

In this example the interest calculated using both the equation and the interest table are the same. Sometimes small differences occur due to rounding.

SIMPLE INTEREST ON $100 (365 DAY BASIS) DAY

11.50 % INTEREST

DAY

11.75 % INTEREST

DAY

12.00 % INTEREST

DAY

12.25 % INTEREST

DAY

12.50 % INTEREST

DAY

12.75 % INTEREST

30 60 90

0.945205 1.890411 2.835616

30 60 90

0.965753 1.931507 2.897260

30 60 90

0.986301 1.972603 2.958904

30 60 90

1.006849 2.013699 3.020548

30 60 90

1.027397 2.054795 3.082192

30 60 90

1.047945 2.095890 3.143836

120 150 180

3.780822 4.726027 5.671233

120 150 180

3.863014 4.828767 5.794521

120 150 180

3.945205 4.931507 5.917808

120 150 180

4.027397 5.034247 6.041096

120 150 180

4.109589 5.136986 6.164384

120 150 180

4.191781 5.239726 6.287671

210 240 270

6.616438 7.561644 8.506849

210 240 270

6.760274 7.726027 8.691781

210 240 270

6.904110 7.890411 8.876712

210 240 270

7.047945 8.054795 9.061644

210 240 270

7.191781 8.219178 9.246575

210 240 270

7.335616 8.383562 9.431507

300 330 360

9.452055 10.397260 11.342466

300 330 360

9.657534 10.623288 11.589041

300 330 360

9.863014 10.849315 11.835616

300 330 360

10.068493 11.075342 12.082192

300 330 360

10.273973 11.301370 12.328767

300 330 360

10.479452 11.527397 12.575342

365 366

11.500000 11.531507

365 366

11.750000 11.782192

365 366

12.000000 12.032877

365 366

12.250000 12.283562

365 366

12.500000 12.534247

365 366

12.750000 12.784932

Figure 26–3 Interest Table Section 1 Promissory Notes

750-777_CH26_868829.indd 755

755

9/15/05 1:57:57 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Using a chart like this, describe the step-by-step procedure for determining the maturity value of a promissory note.

$ETERMININGTHE-ATURITY6ALUEOFA0ROMISSORY.OTE

Do the Math Marty Herick is the owner of CyberAction, a new computer-game store. Marty has just signed a promissory note with Excelsior Bank. He plans to use the loan to purchase and update his computer-game inventory. Using the formula, what is the interest on the $20,000, 90-day note with a 10.5% interest rate? What is the maturity value?

Problem 26–1 Calculating Interest and Finding Maturity Values Instructions Using the formula, compute the interest and maturity values for each of the following notes. Record your answers in your working papers. Use the interest table to check your computations. 1. 2. 3. 4.

Principal

Interest Rate

$ 4,000 10,000 6,500 900

11.5% 11.75% 12.75% 12.25%

Term 60 90 60 120

days days days days

Problem 26–2 Calculating Interest Instructions Calculate the interest for each of the following notes. Record your answers in your working papers. Principal 1. 2. 3. 4.

756

$ 600 3,500 9,600 2,500

Interest Rate 15% 12% 9% 10%

Term 90 60 4 180

days days months days

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 756

9/15/05 1:57:58 PM

Notes Payable

SECTION 2

In this section you will journalize transactions involving notes payable. Recall that a note payable is a promissory note issued to a creditor. For example, a business may issue a note payable to borrow money from a bank. Notes that a business issues are recorded in the Notes Payable account. Notes Payable is a liability account; its normal balance is a credit. When the due date of a note extends beyond one year, the note is classified as a long-term liability. Long-term liabilities are debts that become due after one year. Businesses frequently issue two types of notes: interest-bearing notes and non-interest-bearing notes. We consider both types of notes in this section.

Interest-Bearing Notes Payable What Is an Interest-Bearing Note Payable? A note that requires the principal plus interest to be paid on the maturity date is called an interest-bearing note payable . The note issued by On Your Mark (in Section 1) is an interest-bearing note. Its maturity value is $2,570.89 ($2,500.00 principal  $70.89 interest).

Recording the Issuance of an Interest-Bearing Note Payable

BEFORE YOU

READ

Main Idea

Businesses issue and accept two types of notes: interest-bearing notes and non-interest-bearing notes.

Read to Learn… ➤ what an interest-bearing

promissory note is. (p. 757) ➤ why a “non-interest-bearing”

note does have interest expense. (p. 759)

Key Terms

long-term liabilities interest-bearing note payable non-interest-bearing note payable bank discount proceeds other expense

Let’s record On Your Mark’s interest-bearing note payable as an example.

B u s i n e s s Tr a n s a c t i o n On April 3 On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. ANALYSIS

Identify Classify /

1. The accounts affected are Cash in Bank and Notes Payable. 2. Cash in Bank is an asset account. Notes Payable is a liability account. 3. Cash in Bank is increased by $7,000. Notes Payable is increased by $7,000.

Section 2 Notes Payable

750-777_CH26_868829.indd 757

757

9/15/05 1:58:00 PM

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $7,000. 5. Increases to liability accounts are recorded as credits. Credit Notes Payable for $7,000.

T ACCOUNTS

6.

Cash in Bank Debit  7,000

JOURNAL ENTRY

Notes Payable

Credit 

7.

Credit  7,000

Debit 

GENERAL JOURNAL DATE 1 2

20-Apr.

3 4

DESCRIPTION

POST. REF.

PAGE DEBIT

12

CREDIT 1

3 Cash in Bank Notes Payable Note 6

7 0 0 0 00

2

7 0 0 0 00

5

3 4 5

Recording the Payment of an Interest-Bearing Note Payable The maturity date of On Your Mark’s note payable to State Street Bank is July 2. You can verify this by using the time calendar in Figure 26–2 on page 754. The interest is $207.12, calculated as follows:

Principal  Interest Rate  Time
Interest $7,000  .12  90/365
$207.12 The maturity value of the note is $7,207.12 ($7,000.00 principal  $207.12 interest).

B u s i n e s s Tr a n s a c t i o n On July 2 On Your Mark issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the note payable issued April 3. ANALYSIS

Identify Classify /

758

1. The accounts affected are Notes Payable, Interest Expense, and Cash in Bank. 2. Notes Payable is a liability account. Interest Expense is an expense account. Cash in Bank is an asset account. 3. Notes Payable is decreased by $7,000. Interest Expense is increased by $207.12. Cash in Bank is decreased by $7,207.12.

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 758

9/15/05 1:58:03 PM

DEBIT-CREDIT RULE

4. Decreases to liability accounts are recorded as debits. Debit Notes Payable for $7,000. Increases to expense accounts are recorded as debits. Debit Interest Expense for $207.12. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $7,207.12.

T ACCOUNTS

6.

Notes Payable Debit  7,000

Cash in Bank

Credit 

Credit  7,207.12

Debit 

Interest Expense Debit  207.12

JOURNAL ENTRY

Credit 

7.

GENERAL JOURNAL DATE 1 2 3 4 5

20-July

DESCRIPTION

POST. REF.

PAGE DEBIT

22

CREDIT 1

2 Notes Payable Interest Expense Cash in Bank Check 3892

7 0 0 0 00 2 0 7 12

2 3

7 2 0 7 12

4 5

Non-Interest-Bearing Notes Payable How Is Interest Paid on a Non-Interest-Bearing Note? Sometimes a bank requires a borrower to pay the interest on a note in advance. On the issue date, the bank deducts the interest from the face value of the note. This reduces the amount of money the borrower receives. When interest is deducted in advance from the face value of the note, the note is called a non-interest-bearing note payable . The note is “non-interest-bearing” because no interest rate is stated on the note. The interest deducted in advance is called the bank discount . The interest rate used to calculate the bank discount is called the discount rate. The cash received by the borrower is called the proceeds . The proceeds equal the face value of the note minus the bank discount. For a non-interest-bearing note payable, the maturity value is the same as the face value. This is because the interest is deducted from the face value on the issue date. Figure 26–4 on page 760 shows an example of a non-interest-bearing note payable.

Section 2 Notes Payable

750-777_CH26_868829.indd 759

759

9/15/05 1:58:05 PM

13

NOTE

$ 1,500.00

Ninety days

Date

June 12

after date I promise to pay to

First Federal Bank

the sum of

One thousand five hundred

Due date

20 --

dollars.

September 10, 20--

Figure 26–4 NonInterest-Bearing Note Payable

Michael Brown

Calculating Non-Interest-Bearing Notes Payable

AS YOU

READ

It’s Not What It Seems Non-Interest-Bearing Note The term noninterest-bearing might imply that the note has no interest charge. This is not the case.

Let’s calculate the proceeds of the non-interest-bearing note payable shown in Figure 26– 4. The note was discounted at a rate of 12% by First Federal Bank, Note 13. The first step in calculating the proceeds on a non-interest-bearing note is to calculate the bank discount. This is the interest on the note. (Notice that the formula is similar to the one used to compute interest on an interest-bearing note.)

Face Value  Discount Rate  Time
Bank Discount $1,500  .12  90/365
$44.38 The bank discount is subtracted from the face value of the note to determine the proceeds. The proceeds are $1,455.62 ($1,500.00  $44.38).

Recording the Issuance of a Non-Interest-Bearing Note Payable The bank discount is recorded in a contra liability account called Discount on Notes Payable. The normal balance of Discount on Notes Payable is a debit. The bank discount is the future interest expense on the note. However, the bank discount is not recorded in an expense account until the note matures and the interest expense has been incurred. Now that we calculated the discount, let’s record the issuance of the non-interest-bearing note for On Your Mark.

B u s i n e s s Tr a n s a c t i o n On June 12 On Your Mark signed a $1,500, 90-day non-interest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. ANALYSIS

Identify Classify /

760

1. The accounts affected are Cash in Bank, Discount on Notes Payable, and Notes Payable. 2. Cash in Bank is an asset account. Discount on Notes Payable is a contra liability account. Notes Payable is a liability account. 3. Cash in Bank is increased by $1,455.62. Discount on Notes Payable is increased by $44.38. Notes Payable is increased by $1,500.00.

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 760

9/15/05 1:58:10 PM

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $1,455.62. Increases to contra liability accounts are recorded as debits. Debit Discount on Notes Payable for $44.38. 5. Increases to liability accounts are recorded as credits. Credit Notes Payable for $1,500.00.

T ACCOUNTS

6.

Notes Payable

Cash in Bank Debit  1,455.62

Credit 

Credit  1,500.00

Debit 

Discount on Notes Payable Debit  44.38

Credit 

7.

JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4 5

DESCRIPTION

POST. REF.

20-June 12 Cash in Bank Discount on Notes Payable Notes Payable Note 13

PAGE DEBIT

20

CREDIT 1

1 4 5 5 62 4 4 38

2 3

1 5 0 0 00

5

6

6

Businesses report the Discount on Notes Payable account on the balance sheet as a deduction from Notes Payable. The difference between the Notes Payable account and the Discount on Notes Payable account is the book value of notes payable. Figure 26–5 shows the Liabilities section of the balance sheet for On Your Mark on June 30. It shows that the book value of notes payable is $1,455.62 ($1,500  $44.38).

AS YOU

READ

Compare and Contrast

On Your Mark Athletic Wear Balance Sheet June 30, 20-Liabilities Notes Payable Less: Discount on Notes Payable

4

1 5 0 0 00 4 4 38

1 4 5 5 62

Types of Notes Payable How is an interestbearing note payable similar to a non-interestbearing note payable? How are they different?

Figure 26–5 Reporting Non-Interest-Bearing Notes Payable on the Balance Sheet

Section 2 Notes Payable

750-777_CH26_868829.indd 761

761

9/15/05 1:58:12 PM

Recording the Payment of a Non-Interest-Bearing Note Payable When the non-interest-bearing note payable matures and is due, On Your Mark will • •

pay First Federal Bank $1,500, the face value of the note, and record the interest expense by transferring the bank discount to interest expense.

We will look at each of these individually and as a compound journal entry.

B u s i n e s s Tr a n s a c t i o n On September 10 On Your Mark issued Check 4241 for $1,500 to First Federal Bank in payment of the June 12 non-interest-bearing note payable. ANALYSIS

Identify Classify /

1. The accounts affected are Notes Payable and Cash in Bank. 2. Notes Payable is a liability account. Cash in Bank is an asset account. 3. Notes Payable is decreased by $1,500. Cash in Bank is decreased by $1,500.

DEBIT-CREDIT RULE

4. Decreases to liability accounts are recorded as debits. Debit Notes Payable for $1,500. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $1,500.

T ACCOUNTS

6.

Notes Payable Debit  1,500

JOURNAL ENTRY

Credit 

7.

Credit  1,500

Debit 

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

20-Sept. 10 Notes Payable Cash in Bank Check 4241

5

762

Cash in Bank

POST. REF.

PAGE DEBIT

42

CREDIT 1

1 5 0 0 00

2

1 5 0 0 00

3 4 5

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 762

9/15/05 1:58:14 PM

When a non-interest-bearing note payable matures, the amount of the bank discount is recognized as an expense. The bank discount is transferred from the Discount on Notes Payable account to the Interest Expense account. As the following T accounts demonstrate, Interest Expense is debited for $44.38 and Discount on Notes Payable is credited for $44.38. When this transaction is recorded, the balance of the Discount on Notes Payable account is reduced to zero. Discount on Notes Payable

Interest Expense Debit  9/10 44.38

Credit 

Debit  6/12 44.38

Credit  9/10 44.38

You could record two separate journal entries: 1. the payment of the non-interest-bearing note payable (in the cash payments journal), then 2. the interest expense (in the general journal) It is simpler, however, to prepare one compound entry in the general journal as shown. GENERAL JOURNAL DATE 1 2 3 4 5 6 7

DESCRIPTION

20-Sept. 10 Notes Payable Interest Expense Cash in Bank Discount on Notes Payable Check 4241

POST. REF.

PAGE DEBIT

43

CREDIT 1

1 5 0 0 00 4 4 38

2 3

1 5 0 0 00 4 4 38

4 5 6 7

The Interest Expense account is classified as an other expense account. An other expense is a nonoperating expense. This means that the expense does not result from the normal operations of the business. Other expenses appear in a separate section on the income statement, as deductions from operating income.

Section 2 Notes Payable

750-777_CH26_868829.indd 763

763

9/15/05 1:58:15 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table similar to this one to list three facts about the types of notes covered in this section.

4YPEOF.OTE

&ACT

&ACT

&ACT

Do the Math Franklin Enterprises can borrow $10,000 for 30 days at 5% at the Jefferson City Bank or $10,000 for 45 days at 4.5% at Lincoln National Bank. Answer the following questions. 1. Which bank note results in the least amount of interest expense? 2. How much in interest expense can be saved?

Problem 26–3 Recording the Issuance of an Interest-Bearing Note Payable On June 12 Frank’s Lobster Pound issued a $9,000, 120-day, 12% note payable to American Bank of Commerce. 1. Which account is debited? What is the debit amount? 2. Which account is credited? What is the credit amount? 3. What is the classification of each account? 4. What is the maturity value of the note?

Problem 26–4 Recording the Issuance of a Non-Interest-Bearing Note Payable On October 14 Canton Car Care Center issued a $10,000, 60-day, 12% non-interestbearing note payable to Canton National Bank. 1. Which accounts are debited and which are credited? What are the debit and credit amounts? 2. Compute the bank discount. What is the amount of the proceeds? 764

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 764

9/15/05 1:58:24 PM

Notes Receivable

SECTION 3

In this section you will journalize transactions involving notes receivable. If you have ever loaned someone money and asked the person to repay the loan by a specific date, you understand the basic concept of a note receivable. Sometimes such a loan includes payment of a specified amount of interest; other times no interest is expected.

BEFORE YOU

READ

Main Idea

Businesses record the receipt of a note receivable as well as the payment of the note.

Recording the Receipt of a Note Receivable

Read to Learn… ➤ how to record a note

How Do You Convert an Account Receivable to a Note Receivable? When a customer needs additional time to pay an account receivable, he or she may be asked to sign a promissory note. The note replaces the account receivable. Promissory notes that a business accepts from customers are called notes receivable. Notes Receivable is an asset account, and its normal balance is a debit. A note receivable is due on a specific date and carries an interest charge for the term of the note. The interest earned on a note receivable is recorded in the Interest Income account. Interest Income is an other revenue account. Other revenue , also known as nonoperating revenue accounts, track revenue that a business receives from activities other than its normal operations. Other revenue appears in a separate section on the income statement, as an increase to operating income.

receivable. (p. 765) ➤ how to record the payment of a note receivable. (p. 766)

Key Terms other revenue

B u s i n e s s Tr a n s a c t i o n On March 1 On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8 On Your Mark received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4. ANALYSIS

Identify Classify /

1. The accounts affected are Notes Receivable, Accounts Receivable (controlling), and Accounts Receivable—Joe Dimaio (subsidiary). 2. Notes Receivable, Accounts Receivable (controlling), and Accounts Receivable—Joe Dimaio (subsidiary) are asset accounts. 3. Notes Receivable is increased by $1,750. Accounts Receivable (controlling) and Accounts Receivable—Joe Dimaio (subsidiary) are decreased by $1,750.

Section 3 Notes Receivable

750-777_CH26_868829.indd 765

765

9/15/05 1:58:26 PM

DEBIT-CREDIT RULE

4. Increases to asset accounts are recorded as debits. Debit Notes Receivable for $1,750. 5. Decreases to asset accounts are recorded as credits. Credit Accounts Receivable (controlling) for $1,750. Also credit Accounts Receivable— Joe Dimaio (subsidiary) for $1,750.

T ACCOUNTS

6.

Notes Receivable Debit  1,750

Accounts Receivable

Credit 

Credit  1,750

Debit 

Accounts Receivable Subsidiary Ledger Accounts Receivable—Joe Dimaio Credit  1,750

Debit 

JOURNAL ENTRY

7.

GENERAL JOURNAL DATE 1 2

20-Apr.

DESCRIPTION

POST. REF.

PAGE DEBIT

13

CREDIT 1

8 Notes Receivable Accts. Rec./Joe Dimaio Note 4

3 4

1 7 5 0 00

2

1 7 5 0 00

3 4

Recording the Payment of a Note Receivable How Do You Record Payment of a Note? The note from Joe Dimaio is due on June 5. The maturity value of the note is $1,785.96 ($1,750.00 principal  $35.96 interest).

Principal  Interest Rate $1,750  .125

 Time
Interest  60/365
$35.96

B u s i n e s s Tr a n s a c t i o n On June 7 On Your Mark received a check dated June 5 for $1,785.96 from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of $35.96, Receipt 996. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4 5

766

20-June

DESCRIPTION

POST. REF.

PAGE DEBIT

18

CREDIT 1

7 Cash in Bank Notes Receivable Interest Income Receipt 996

1 7 8 5 96

2

1 7 5 0 00 3 5 96

3 4 5

Chapter 26 Notes Payable and Receivable

750-777_CH26_868829.indd 766

9/15/05 1:58:30 PM

SECTION 3 AFTER YOU

Assessment

READ

Reinforce the Main Idea Create a table similar to the one here to determine which accounts to debit and credit for each transaction. Choose from these accounts and write the account title in the proper column: Accounts Receivable/Customer; Cash in Bank; Interest Income; Sales; Sales Tax Payable; and Notes Receivable.

4RANSACTION

!CCOUNTS #REDITED

!CCOUNTS $EBITED

3OLDMERCHANDISEONACCOUNT TOACHARGECUSTOMERPLUS SALESTAX 2ECEIVEDANINTEREST BEARING NOTEINPAYMENTOFTHE ACCOUNTRECEIVABLE 2ECEIVEDPAYMENT FORTHENOTE

Do the Math Your accounting manager has just finished a graph illustrating the possible interestbearing notes available from the region’s banks. Review the graph and give your boss your recommendation of which bank will provide the best loan value. 90-DAY NOTES 7.50

7.75

8.00

8.25

7.875

Central Bankers

8.250

Syracuse National New York Bankcorp

7.750 8.000

First Federal

Percentage Rates

Problem 26–5 Analyzing a Source Document Instructions Examine the note illustrated here. In your working papers, make the appropriate journal entry on page 14 of the general journal for Eli’s Catering Company. The note was discounted at a rate of 12% by First Federal Bank.

55

NOTE

$ 2,500.00

Ninety days

Date

June 12

20 --

after date I promise to pay to

First Federal Bank

the sum of

Two thousand five hundred and no/100

Due date

dollars.

September 10, 20--

Owner, Eli's Catering Co.

Section 3 Notes Receivable

750-777_CH26_868829.indd 767

767

9/15/05 1:58:33 PM

Summary

CH A P T ER 2 6 Key Concepts

1. A promissory note, often just called a note, is a written promise to pay an amount of money by a specific future date. It allows businesses to make purchases and pay for them at a later date. 2. A note payable is a promissory note that a business issues to a creditor or to a bank to obtain a loan. A note receivable is a promissory note that a business accepts from a credit customer. Laws require a promissory note to contain certain information: • • • • • • •

maker: person or business signing a note and promising to repay the principle and interest payee: person or business the payment will be made to principal or face value: amount borrowed interest rate: fee charged for use of money; stated as a percentage of the principal term: amount of time the borrower has to repay the note issue date: date on which a note is written maturity date: due date of the note

The formula used to calculate interest is:

Interest
Principal  Interest Rate  Time 3. Here is a comparison of interest-bearing and non-interest-bearing notes payable: Interest-Bearing Note Payable Distinction

Interest rate is stated on note.

No interest rate is stated on the note.

Interest

Interest is paid at maturity date.

Interest is called bank discount. It is deducted from the face value on the note’s issue date.

Example

Interest rate  6% Face value  $1,000 Term  3 months

Bank discount  6% Face value  $1,000 Term  3 months

Calculation

Interest  Principal
Interest Rate
Time Interest  $1,000
0.06
3/12 Interest  $15

Bank Discount  Face Value
Discount Rate
Time Bank Discount  $1,000
0.06
3/12 Bank Discount  $15

Proceeds

Proceeds  Face Value Proceeds  $1,000

Proceeds  Face Value  Bank Discount Proceeds  $1,000  $15  $985

Issuance of Note

Cash in Bank Notes Payable

1,000

Payment of Note

Notes Payable Interest Expense Cash in Bank

1,000 15

4. To record the issuance of an interest-bearing note payable:

768

Non-Interest-Bearing Note Payable

Cash in Bank Discount on Notes Payable Notes Payable

1,000

Notes Payable 1,000 Interest Expense 15 Cash in Bank Discount on Notes Payable

1,015

Cash in Bank Debit  xxx

985 15

Credit 

1,000

1,000 15

Notes Payable Debit 

Credit  xxx

Chapter 26 Summary

750-777_CH26_868829.indd 768

9/15/05 1:58:39 PM

Summary

CHAPT E R 26

To record the payment of an interest-bearing note payable: Notes Payable

Interest Expense

Credit 

Debit  xxx

Cash in Bank

Credit 

Debit  xxx

Credit  xxx

Debit 

To record the issuance of a non-interest-bearing note payable: Cash in Bank

Discount on Notes Payable

Credit 

Debit  xxx

Notes Payable

Credit 

Debit  xxx

Credit  xxx

Debit 

To record the payment of a non-interest-bearing note payable: Interest Expense

Notes Payable Credit 

Debit  xxx

Credit 

Debit  xxx

5. To record the receipt of a note receivable converted from an account receivable:

Cash in Bank Credit  xxx

Debit 

Notes Receivable

Credit  xxx

Debit 

Accounts Receivable (controlling/subsidiary)

Credit 

Debit  xxx

Discount on Notes Payable

Credit  xxx

Debit 

To record the payment of a note receivable: Cash in Bank Debit  xxx

Notes Receivable

Credit 

Debit 

Interest Income

Credit  xxx

Debit 

Credit  xxx

Key Terms bank discount

(p. 759)

maker

(p. 752)

other revenue

(p. 765)

face value

(p. 752)

maturity date

(p. 752)

payee

(p. 752)

interest

(p. 754)

maturity value

(p. 755)

principal

(p. 752)

interest-bearing note payable (p. 757)

non-interest-bearing note payable (p. 759)

proceeds

(p. 759)

promissory note

(p. 752)

interest rate

(p. 752)

note payable

(p. 752)

term

(p. 752)

issue date

(p. 752)

note receivable

(p. 752)

long-term liabilities

(p. 757)

other expense

(p. 763) Chapter 26 Summary

750-777_CH26_868829.indd 769

769

9/15/05 1:58:42 PM

C H A P T ER 2 6 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

Promissory Notes a. Name the two parties to a promissory note. Which party issues the note? Which party receives the note? b. Describe a situation in which a business might (a) receive a promissory note and (b) issue a promissory note. Notes Payable and Notes Receivable a. What type of account is Notes Payable, and what is its normal balance? b. What type of account is Notes Receivable, and what is its normal balance? Interest-Bearing and Non-Interest-Bearing Notes a. What is the difference between interest-bearing and non-interest-bearing notes? b. What is the difference between interest and a bank discount? Notes Payable a. What accounts are affected by the issuance of an interest-bearing note payable, and how are they affected? b. What accounts are affected by the payment of an interest-bearing note payable, and how are they affected? Journalizing Notes Receivable a. What accounts are affected by the receipt of a note receivable, and how are they affected? b. What accounts are affected by the payment of a note receivable, and how are they affected?

Apply Key Terms As a staff accountant for Advanced Micro Devices, you have been asked to discuss the company’s notes payable and receivable with the accounting clerks. Prepare note cards containing the terms below. Arrange these terms in meaningful groups. Explain why you have grouped terms together. Are they related? Are they part of the same thing? Is one the result of another? Are they opposites? bank discount face value interest interest-bearing note payable interest rate issue date long-term liabilities

770

maker maturity date maturity value non-interestbearing note payable note payable note receivable other expense

other revenue payee principal proceeds promissory note term

Chapter 26 Review and Activities

750-777_CH26_868829.indd 770

9/15/05 1:58:45 PM

Computerized Accounting CHAPT E R 26 Notes Receivable and Payable Making the Transition from a Manual to a Computerized System Task

Manual Methods

Recording notes receivable and payable transactions

• Using the general journal, record the receipt or issuance of the note. • Post the entry to the appropriate accounts in the general ledger and subsidiary ledgers. • Journalize and post the entry to record the receipt or payment of cash and interest. • Calculate new balances for all accounts affected.

Computerized Methods • Using the general journal, record the receipt or issuance of the note. The entry is automatically posted to the appropriate accounts. • Record receipts or payment of notes.

Q&A Peachtree Question

Answer

How do I record the issuance of a note payable?

1. 2. 3. 4. 5.

From the Tasks menu, select Receipts. Accept the Cash in Bank account number as the Cash account. Enter a Reference number, usually the note number. Click on the Apply to Revenues tab. Enter the Notes Payable account number and the note amount.

How do I record the receipt of a note receivable payment?

1. 2. 3. 4. 5.

From the Tasks menu, select Receipts. Accept the Cash in Bank account number as the Cash account. Enter a Reference number, usually the note number. Enter the Notes Receivable account number and the note amount. Enter the Interest Income account number and amount.

QuickBooks Q & A QuickBooks Question

Answer

How do I record the issuance of a note payable?

1. 2. 3. 4.

From the Banking menu, select Make Deposits. Accept Cash in Bank in the Deposit To field and enter the date. Enter the name of the payee. Enter Notes Payable as the account, an explanation, and the note amount.

How do I record the receipt of a note receivable payment?

1. 2. 3. 4. 5.

From the Customers menu, select Make General Journal Entries. Enter the date and reference. Debit the Cash account for the total amount received. Credit Notes Receivable for the note portion of the amount received. Credit Interest Income for the interest portion of the amount received.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 26 Computerized Accounting

750-777_CH26_868829.indd 771

771

9/15/05 1:58:51 PM

Problems

C H A P T ER 2 6 Complete problems using:

SMART GUIDE Step–by–Step Instructions: Problem 26–6 1. Select the problem set for Sunset Surfwear (Prob. 26–6). 2. Rename the company and set the system date. 3. Record the transactions using the Receipts and Payments options. Enter each transaction in the proper accounting period (month). 4. Print a Cash Receipts Journal and a Cash Disbursements Journal to proof your work. 5. Complete the Analyze activity. 6. End the session.

TIP: Set the date range on the journal reports to print the transactions for all of the periods.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 26–6 1. Restore the Problem 26-6.QBB file. 2. Record the transactions using the Make Deposits and Write Checks options. Enter each transaction in the proper accounting period (month). 3. Print a Journal report. 4. Complete the Analyze activity. 5. Back up your work.

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Problem 26–6 Recording Transactions for Interest-Bearing Notes Payable Instructions In your working papers, record the following transactions in a cash receipts journal (page 22) and a cash payments journal (page 26). Date

Jan. 14 Sunset Surfwear borrowed $1,500 from First One Bank by issuing a 90-day, 12% interest-bearing note payable, Note 78. Apr. 14 Issued Check 168 for $1,544.38 to First One Bank in payment of the $1,500 note issued on January 14, plus interest of $44.38. May 31 Borrowed $12,400 from Merchant’s Bank and Trust by issuing a 90-day, 12.5% interest-bearing note, Note 79. Aug. 29 Paid Merchant’s Bank and Trust the maturity value of the note issued on May 31, $12,782.19, Check 284.

Analyze

Calculate the amount of interest paid on notes in January.

Problem 26–7 Recording Transactions for Non-Interest-Bearing Notes Payable Instructions In your working papers, record the following transactions in a cash receipts journal (page 14) and a cash payments journal (page 16). Date

Transactions

June 10

InBeat CD Shop borrowed $6,000 from BankOne by issuing a 60-day, non-interest-bearing note payable (proceeds, $5,901.37) that the bank discounted at 10%, Note 67. Aug. 9 Issued Check 205 for $6,000 in payment of the note issued June 10 and recorded the interest expense. 30 Borrowed $16,000 from Citizens Bank by issuing a 120-day, non-interest-bearing note payable less the 10.5% bank discount of $552.33, Note 68. Dec. 28 Issued Check 398 in payment of the note issued on August 30 and recorded the interest expense.

Analyze

772

Transactions

Explain why the account Discount on Notes Payable is used.

Chapter 26 Problems

750-777_CH26_868829.indd 772

4/6/06 6:38:39 PM

Problems Problem 26–8 Recording Notes Payable and Notes Receivable Instructions In your working papers, record the following transactions in a cash receipts journal (page 47), cash payments journal (page 56), and general journal (page 19) for Cycle Tech Bicycles. Date

Transactions

Mar. 19 Borrowed $9,000 from Desert Palms Savings and Loan by issuing a 90-day, 12% interest-bearing note payable, Note 87. June 4 Received a 120-day, 13% note receivable for $1,900 from Greg Kellogg as a time extension on his account receivable, Note 6. 17 Paid Desert Palms Savings and Loan the maturity value of the note issued on March 19, Check 2784. Sept. 29 Received a check from Greg Kellogg for the maturity value of the note dated June 1, Receipt 628. Oct. 6 Borrowed $2,700 from Jonesboro Bank and Trust by issuing a 60-day, non-interest-bearing note payable discounted at 11.5%, Note 88. Dec. 5 Prepared a check for the note issued on October 6 and recorded the interest expense, Check 3954.

Analyze

Compute the amount of interest Cycle Tech Bicycles will earn on Greg Kellogg’s June 4 note.

Problem 26–9 Recording Notes Payable and Notes Receivable The following is a partial list of accounts used by River’s Edge Canoe & Kayak. 101 115 120 201

Cash in Bank Accounts Receivable Notes Receivable Accounts Payable

205 207 415 640

Notes Payable Discount on Notes Payable Interest Income Interest Expense

Instructions In your working papers, record the following transactions in a cash receipts journal (page 67), cash payments journal (page 73), and general journal (page 27).

CHAPT E R 26 SMART GUIDE Step–by–Step Instructions: Problem 26–7 1. Select the problem set for InBeat CD Shop. 2. Rename the company and set the system date. 3. Record the transactions. 4. Print a Cash Receipts Journal and a Cash Disbursements Journal to proof your work. 5. Complete the Analyze activity. 6. End the session.

Step–by–Step Instructions: Problem 26–8 1. Select the problem set for Cycle Tech Bicycles. 2. Rename the company and set the system date. 3. Record the transactions. 4. Print a Cash Receipts Journal and a Cash Disbursements Journal to proof your work. 5. Complete the Analyze activity. 6. End the session.

Step–by–Step Instructions: Problem 26–9 1. Select the problem set for River’s Edge Canoe & Kayak. 2. Rename the company and set the system date. 3. Record the transactions. 4. Print a Cash Receipts Journal and a Cash Disbursements Journal to proof your work. 5. Complete the Analyze activity. 6. End the session.

CONTINUE

Chapter 26 Problems

750-777_CH26_868829.indd 773

773

9/15/05 1:58:55 PM

Problems

C H A P T ER 2 6 Date

May

SMART GUIDE Step–by–Step Instructions: Problem 26–10 1. Select the problem set for Buzz Newsstand. 2. Rename the company and set the system date. 3. Record the transactions in the correct period. 4. Print a Sales Journal, Cash Receipts Journal, and a General Journal. 5. Complete the Analyze activity. 6. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 26–10 1. Restore the Problem 26-10.QBB file. 2. Record the transactions in the correct period. 3. Print a Journal report. 4. Complete the Analyze activity. 5. Back up your work.

SOURCE DOCUMENT PROBLEM Problem 26–10 Use the source documents in your working papers to record the transactions for this problem.

774

Transactions (cont.)

7

Borrowed $4,000 from Union Bank by issuing a 60-day, 9.5% non-interest-bearing note, Note 284. 15 Issued a $3,000, 90-day, 9% interest-bearing note to Trailhead Canoes in place of the amount owed on account, Note 285. 21 Received a 120-day, 10% note for $1,200 from Cathy Wilcox for an extension of time on her account, Note 94. July 6 Issued Check 4711 in payment of the non-interest-bearing note given to Union Bank on May 7. Aug. 13 Issued Check 5044 for the maturity value of the note issued to Trailhead Canoes on May 15. Sept. 18 Received a check from Cathy Wilcox for the maturity value of the note dated May 21, Receipt 5921.

Analyze

CHALLENGE PROBLEM

Compare Notes 284 and 285. Which of the two notes was most advantageous to River’s Edge Canoe & Kayak?

Problem 26–10 Renewing a Note Receivable

Occasionally, on the maturity date, a note may be renewed instead of being paid. When this occurs, (1) the interest on the first note is paid, (2) the first note is canceled, and (3) a new note for the same principal amount is issued, usually at a higher interest rate. Buzz Newsstand had the following transactions.

Instructions In your working papers, record the following transactions on general journal page 24. Date

Transactions

Mar. 14 Sold merchandise on account to Saba Nadal for $1,800, plus sales tax of $108.00, terms 30 days, Sales Slip 388. Apr. 13 Accepted a 60-day, 9% note for $1,908.00 from Saba Nadal in place of the account receivable, Note 416. June 12 Received the interest due from Saba Nadal for the note dated April 13 and agreed to renew the note at 10% for 90 days, Receipt 1387 and Note 417. Sept. 10 Received a check from Saba Nadal for the maturity value of the note issued June 12, Receipt 1555.

Analyze

Calculate the total amount of interest earned in March.

Chapter 26 Problems

750-777_CH26_868829.indd 774

9/15/05 1:58:56 PM

Winning Competitive Events

C HAPTER 26

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. Signed a 90-day, 10% note a. Debit Cash, credit Notes Receivable b. Debit Cash, credit Notes Payable c. Debit Accounts Receivable, credit Cash d. Debit Cash, credit Accounts Receivable Use the following information for questions 2 & 3. October 15, Morton Co. accepts a 60-day, 11% note from Anderson Imports for an extension of time on its account, $990.00 Notes Receivable No. 5. 2. The credit for this transaction would be made to a. Accounts Payable. b. Accounts Receivable. c. Notes Payable. d. Notes Receivable. 3. The effect of this transaction on the customer’s account in the accounts receivable ledger is a. to decrease the account balance. b. to increase the account balance. c. no change in the account balance. d. not known. 4. Find the interest and maturity value for a 60-day note with principal of $1,500 and interest at 8 percent. a. $120.00 interest; $1,620.00 maturity value b. $32.88 interest; $1,532.88 maturity value c. $3.29 interest; $1,503.29 maturity value d. $19.74 interest; $1,519.74 maturity value

Business Professionals of America MULTIPLE CHOICE 5. Qupre, Inc. signed a 90-day, 9.75% note with First State Bank for $1,200 on Need More Help? August 1. The maturity date for the Go to glencoeaccounting.glencoe.com and note is click on Student Center. Click on Winning a. October 30. Competitive Events and select Chapter 26. b. November 1. • Practice Questions and Test-Taking Tips c. October 28. • Concept Capsules and Terminology d. November 2. glencoeaccounting.glencoe.com

750-777_CH26_868829.indd 775

Chapter 26 Winning Competitive Events

775

10/13/05 11:54:50 PM

C H A P T ER 2 6 Critical Thinking

Notes Payable and Receivable

CASE

STUDY

Merchandising Business: Restaurant/Retail Shop

ETHICS

Is the Boss Always Right?

a mattoefr

))

$ )) Communicating ACCOUNTING

776

Real-World Applications and Connections

1. Explain what a promissory note is and distinguish between the two types, notes payable and notes receivable. 2. Explain how an interest-bearing note and a non-interest-bearing note differ. 3. Calculate the amount of interest to be charged on a $12,000, 8.5%, 90-day interest-bearing note. 4. Explain the difference between interest expense and interest income. 5. You need to borrow $10,000 for six months. Interest rates are expected to drop from 7% to 5.5% within the next week. How much would you save by waiting an additional week to obtain your loan? 6. Consider a $5,000, 6%, 180-day interest-bearing note and a non-interestbearing note for the same amount and time period with a bank discount of 6%. From the borrower’s point of view, which is the better loan and why? Moreno’s Italian Oven is open seven days a week for lunch and dinner. The restaurant seats 60 patrons in a day and averages 90 percent capacity. It is considering expanding into the space adjacent to the restaurant. The cost to remodel the area and buy additional kitchen and restaurant equipment is estimated at $200,000. The rent on the additional space is $1,200 a month. INSTRUCTIONS 1. If Moreno’s could double the number of customers served weekly, calculate how many it could serve per week. 2. If each customer spends an average of $12 per meal, calculate the additional revenue the restaurant would earn per day if it expands and maintains 90 percent capacity. You work for a large property management company. Your boss, Joan, is the senior accountant; and her boss, Frank, is vice president. For the past several months, Joan has been coming to work late, taking long lunches, and leaving early. When Frank calls, she has asked you to tell him that she is “away from her desk.” You think Frank is getting suspicious, and you are starting to feel guilty about lying. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Promote Your Project You write the copy for and design brochures to highlight New South Bank’s many financial products. Today you were asked to prepare a brochure explaining the value of non-interest-bearing notes. Write the copy for this brochure. Design it by hand or on a computer.

Chapter 26 Real-World Applications and Connections

750-777_CH26_868829.indd 776

9/15/05 1:59:00 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

CHAPT E R 26

Allocating Time and Money Good Times Amusement Park has offered you a full-time job. Before you can accept it, you must arrange for transportation. INSTRUCTIONS List estimated costs of owning a car compared to using other transportation. How would each impact the use of your time and your budget?

Long-Term International Loans The International Finance Corporation (IFC) helps finance projects in developing countries to reduce poverty and improve people’s lives. Projects must be profitable and benefit the host country’s economy. For instance, it has provided loans of about $44 million to build a hospital and clinic in Mexico City. Other recipient sectors include transportation, education, and tourism. INSTRUCTIONS Describe how IFC affects people in developing countries.

Your Vehicle Loan If you want to buy a vehicle but cannot pay cash, you need to borrow from a financial institution. To do so, you will be required to sign a legally binding note to make monthly payments for a required period of time. PERSONAL FINANCE ACTIVITY Assume you want to buy a preowned vehicle but do not have all of the cash needed, and prefer not to ask your parents for it. Write a plan considering all aspects of the purchase. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 26.

Evaluating Long-Term Debt When considering a borrower’s long-term debt, lenders often consider the debt to equity ratio. This ratio compares the resources the lender will provide to the borrower’s resources. It is calculated by dividing total liabilities by total stockholders’ equity. Here’s an example: Total liabilities Total stockholder’s equity



$125,670 $103,680

 1.21

This debt to equity ratio of 1.21 to 1 means that lenders would provide more resources than the borrower has. The higher the ratio, the higher is the lender’s claims on the applicant’s assets. A heavy reliance on creditors increases the risk that a business may not be able to meet its financial obligations during a business downturn. INSTRUCTIONS Obtain PETsMART’s most recent balance sheet from the Internet or a public library. Use this and the February 2004 balance sheet in Appendix F for the following tasks. 1. Calculate PETsMART’s debt to equity ratio for both years. 2. Compare how the ratio has changed. As a creditor, how would you interpret this change? glencoeaccounting.glencoe.com

750-777_CH26_868829.indd 777

Chapter 26 Real-World Applications and Connections

777

4/6/06 6:38:47 PM

MINI PRACTICE SET 5

Completing the Accounting Cycle for a Merchandising Corporation

Main Task ▲

Complete the accounting cycle within an assigned time frame.

Summary of Steps ▲

Record transactions in various journals.

▲

Post individual transactions to various ledgers.

▲

Prove the special journals and post the column totals.

▲

Prove cash.

▲

Prepare schedules of accounts receivable and accounts payable.

▲

Complete the work sheet.

▲

Prepare financial statements.

▲

Journalize and post the adjusting and closing entries.

▲

Prepare a post-closing trial balance.

Why It’s Important ▲

Whether you are taking a test or working at a job, you will have time constraints.

778

Kite Loft Inc.

K I T E LOFT INC.

Company Background: The Ramspart family owns and operates a wholesaleretail merchandising business organized as a corporation. The business, called Kite Loft Inc., sells a variety of kites and paper airplanes to regional and local toy store businesses. Your teacher will assign a due date for this project. Working with Kite Loft Inc. will give you an opportunity to complete the accounting cycle within an assigned time frame. Keeping the Accounting Records for Kite Loft Inc.: Kite Loft Inc. uses special journals and a general journal to record its business activity. Max Martin, Kite Loft’s previous accounting clerk, has already journalized and posted the transactions for December 1 through December 15. The transactions recorded thus far are included in the accounting stationery in your working papers. The transactions for December 16 through December 31 are shown on the following pages. Your Job Responsibilities: The forms for completing this activity are included in the working papers. As the accountant for Kite Loft, you are to complete these tasks: (1) Record the remaining December transactions in the sales, cash receipts, purchases, cash payments, and general journals. (2) Post the individual amounts from the five journals to the accounts receivable and accounts payable subsidiary ledgers daily. (3) Post the individual amounts from the General columns of the cash receipts, purchases, cash payments, and general journal daily. (4) Foot, prove, total, and rule the special journals at the end of the month. (5) Post the column totals of the special journals to the general ledger. Use this order for posting: sales, cash receipts, purchases, and cash payments. (6) Prove cash. The balance shown on check stub 619 is $22,752.83. (7) Prepare a schedule of accounts receivable and a schedule of accounts payable. (8) Prepare a trial balance on a ten-column work sheet for the year ended December 31.

Mini Practice Set 5

778-781_MPS05_868829.indd 778

9/15/05 1:44:39 PM

Kite Loft Inc. (continued) Complete the project using:

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

(9) Complete the work sheet. Use this December 31 adjustment information: Merchandise Inventory $24,850.43 Supplies inventory 120.00 Unexpired insurance 660.00 Total federal income taxes 4,500.00 (10) Prepare the income statement from the work sheet information. (11) Prepare a statement of retained earnings. (12) Prepare a balance sheet. (13) Journalize and post the adjusting entries. (14) Journalize and post the closing entries. (15) Prepare a post-closing trial balance.

CHART OF ACCOUNTS Kite Loft Inc. ASSETS

COST OF MERCHANDISE

101 105 110 115 120 125 130

501 505 510 515

Cash in Bank Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Office Equipment Store Equipment

LIABILITIES 201 Accounts Payable 205 Federal Corp. Income Tax Payable 210 Sales Tax Payable STOCKHOLDERS’ EQUITY 301 Capital Stock 305 Retained Earnings 310 Income Summary

Purchases Transportation In Purchases Discounts Purchases Returns and Allowances

EXPENSES 605 610 615 620 625 630 635 640 650

Advertising Expense Bankcard Fees Expense Insurance Expense Miscellaneous Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense Federal Corp. Income Tax Expense

REVENUE 401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

Accounts Receivable Subsidiary Ledger

Accounts Payable Subsidiary Ledger

BES LAR SER SMA TOY

BRA CRE EAS RED STA TAY

Best Toys Lars’ Specialties Serendipity Shop Small Town Toys The Toy Store

Brad’s Kites Ltd. Creative Kites Inc. Easy Glide Co. Reddi-Bright Manufacturing Stars Kites Outlet Taylor Office Suppliers

Mini Practice Set 5

778-781_MPS05_868829.indd 779

779

9/15/05 1:46:10 PM

MINI PRACTICE SET 5 (CONTINUED)

Completing the Accounting Cycle for a Merchandising Corporation Business Transactions: Kite Loft Inc. had the following transactions

SMART GUIDE Step–by–Step Instructions: 1. Select the problem set for Kite Loft Inc. (MP–5). 2. Rename the company and set the system date. 3. Enter all of the sales on account using the Sales/Invoicing option. 4. Record and apply any sales returns using the Credit Memos option. 5. Process the cash receipts using the Receipts option. 6. Enter the purchases on account using the Purchases/Receive Inventory option. 7. Record and apply any purchases returns using the Vendor Credit Memos option. 8. Process all of the cash payments with the Payments option. 9. Record the adjusting entries. 10. Print the following reports: General Journal, Purchases Journal, Cash Disbursements Journal, Sales Journal, and Cash Receipts Journal. 11. Proof your work. 12. Print the following reports: General Ledger, Vendor Ledgers, and Customer Ledgers. 13. Print a General Ledger Trial Balance. 14. Print an Income Statement. 15. Print a Statement of Retained Earnings. 16. Print a Balance Sheet. 17. Close the fiscal year. 18. Print a post-closing trial balance. 19. Complete the Analyze activity and the Audit Test. 20. End the session.

TIP: You should back up your Peachtree files before you perform the year-end closing.

780

December 16 through December 31. Date Dec. 16

Transactions Received Invoice 410 from Reddi-Bright Manufacturing for merchandise purchased on account, $1,475.00.

16

Paid the quarterly federal income tax installment of $1,050.00, Check 610.

16

Issued Check 611 for $2,548.00 to Brad’s Kites Ltd. in payment of Invoice 112 for $2,600.00 less discount of $52.00.

17

Paid the monthly salaries by issuing Check 612 for $4,750.00.

17

Purchased $80.00 of supplies from Taylor Office Suppliers on account, Invoice 830.

17

Received a check for $1,965.60 from Best Toys in payment of Sales Slip 479 for $2,003.40 less a cash discount of $37.80, Receipt 358.

19

Sold merchandise on account to Best Toys, $2,600.00 plus $156.00 sales tax, Sales Slip 484.

19

Prepared Receipt 359 for a $1,716.00 check received from Lars’ Specialties in payment of Sales Slip 480 for $1,749.00 less a $33.00 cash discount.

20

Purchased merchandise on account from Brad’s Kites Ltd., Invoice 215, $1,560.00.

20

Wrote Check 613 to Creative Kites Inc. to apply on account, $375.00.

21

Prepared Credit Memorandum 44 for $106.00 for the return of $100.00 in merchandise by Best Toys, plus sales tax of $6.00.

23

Sold merchandise to Lars’ Specialties on account, $1,580.00 plus sales tax of $94.80, Sales Slip 485.

23

Received a check from Serendipity Shop to apply on account, Receipt 360 for $300.00.

23

Paid Easy Glide Co. for Invoice 326 for $1,890.00 less a $37.80 discount, Check 614 for $1,852.20.

26

Received from The Toy Store a check for $1,102.40 in payment of Sales Slip 483 for $1,123.60 less a cash discount of $21.20, Receipt 361.

26

Returned defective merchandise purchased on account from Brad’s Kites Ltd., $150.00, Debit Memorandum 28.

26

Received Invoice 335 from Easy Glide Co. for merchandise purchased on account totaling $1,630.00.

28

Wrote Check 615 for $120.00 to the Daily Examiner for a monthly advertisement.

28

Small Town Toys sent a check for $450.00 to apply on account, Receipt 362.

29

Paid Stars Kites Outlet $1,625.00 on account, Check 616.

CONTINUE

Mini Practice Set 5

778-781_MPS05_868829.indd 780

9/15/05 1:46:11 PM

Kite Loft Inc. (continued)

Date

Transactions (cont.)

29

Sold to The Toy Store $1,990.00 of merchandise on account, plus $119.40 sales tax, Sales Slip 486.

30

Issued Check 617 to Reddi-Bright Manufacturing for $700.00 to apply on account.

30

Sold merchandise totaling $560.00 plus $33.60 sales tax to the Serendipity Shop on account, Sales Slip 487.

31

Recorded the bank service charge of $10.00 and the bankcard fee of $150.00, from December bank statement.

31

Paid transportation charges of $51.60 for merchandise shipped from Easy Glide Co., Check 618.

31

Recorded cash sales of $3,995.10 plus $239.71 in sales tax, Tape 41.

31

Recorded bankcard sales of $1,736.27 plus sales tax of $104.18, Tape 41.

Analyze

1. Identify where Kite Loft’s outstanding customer balances are kept, and report which customer has the largest balance outstanding and the amount owed. 2. Locate the cash receipts journal, and identify the amount of cash to be debited to the general ledger Cash in Bank account. 3. Calculate Kite Loft’s working capital at December 31.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: 1. Restore the Problem Mini Practice 5.QBB file. 2. Enter all sales on account using the Create Invoices option. 3. Record and apply any sales returns using the Create Credit Memos/ Refunds option. 4. Process all cash receipts. 5. Enter the purchases on account using the Enter Bills option. 6. Record and apply any purchase returns using the Credit option from the Enter Bills window in the Vendors menu. 7. Process all cash payments. 8. Record the adjusting entries. 9. Print a Journal report. 10. Proof your work. 11. Print the following reports: General Ledger, Vendor Balance Summary, and Customer Balance Summary. 12. Print a Trial Balance. 13. Print a Profit & Loss report. 14. Print a Balance Sheet. 15. Close the fiscal year. 16. Print a post-closing Trial Balance. 17. Complete the Analyze activity and the Audit Test. 18. Back up your work.

Mini Practice Set 5

778-781_MPS05_868829.indd 781

781

4/11/06 12:14:50 PM

UNIT 6

Additional Accounting Topics

Personal Finance Q & A Q: Why do I need to know about partnerships? A: Partnership accounting is different from accounting for corporations and sole proprietorships. Q: What does ethics have to do with accounting? A: Everything. Accountants are held to high ethical standards because they are the keepers and communicators of important information. People rely on accountants. THINK IT OVER Since partnerships are a common form of business enterprise, would you consider having a partner in your business? Give several reasons that you would or would not be in favor of this idea. 782

782-783_UN06_868829.indd 782

9/14/05 5:38:50 PM

Internet Project Introduction The Sarbanes-Oxley Act (SOX), signed into law in 2002, applies to publicly held companies and the accounting firms that audit them. The law was passed in response to corporate failures and accounting irregularities that resulted in job losses, massive bad debts, and deep plunges in the values of certain stocks and retirement plans. Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on WebQuest and select Unit 6. Begin your WebQuest by reading the Task. Continue working on your WebQuest as you study Unit 6.

Chapter 27 28 Page

29

805 825 846

THE BIG PICTURE PROGRESS Since passage of the Sarbanes-Oxley Act, more U.S. companies have implemented the following governance reforms:

FINANCIAL EXPERT ON AUDIT COMMITTEE:

95% BOARD EVALUATION POLICIES:

90% DIRECTOR TRAINING:

80% AUDITOR ROTATION POLICIES:

42% Data: Governance Metrics International

Source: Reprinted by permission from BusinessWeek.

glencoeaccounting.glencoe.com

782-783_UN06_868829.indd 783

783

9/14/05 5:39:20 PM

CH A P T ER 2 7

Introduction to Partnerships BEFORE YOU

READ

What You’ll Learn

Predict

1.

Identify the characteristics of a partnership.

2.

Identify the various accounting functions involved with a partnership.

1. 2. 3. 4.

3.

Account for investments in a partnership.

4.

Account for partners’ withdrawals.

5.

Allocate profits and losses to the partners by different methods.

Moss Adams LLP

Define the accounting terms introduced in this chapter.

of 1,400 offers audit and tax services, business consulting, risk

6.

Why It’s Important ▲

Many businesses are organized as partnerships.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business LOOKING AT PARTNERSHIPS Moss Adams LLP claims its spot as the 11th largest accounting and consulting firm in the United States. Its staff management services, and asset valuations. When this accounting partnership began in 1913, it primarily served local forest product businesses in the Seattle, Washington area. The firm now earns approximately $180 million per year with clients in a variety of industries. Moss Adams attributes its success to a decision to become the dominant accounting service provider in selected industries. The firm’s partners and accountants have skills specific to industries like auto sales, apparel, forestry, construction, and health care.

What Do You Think? If you were looking for an accounting firm to handle your audit, why would it be important to you that the firm have specialized experience in your industry?

784

Chapter 27 Introduction to Partnerships

784-805_CH27_868829.indd 784

9/15/05 2:01:01 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Going into business with someone can be smart when two or more people have complementary business skills and resources that can help a business succeed. Business partners should agree about each person’s role in the business and how to share profits and losses. In this chapter you will learn how a partnership agreement helps avoid conflict and contributes to the smooth operation of the business.

glencoeaccounting.glencoe.com

784-805_CH27_868829.indd 785

Personal Connection 1. What are some rules in your workplace? 2. How do these rules help you and your co-workers avoid conflict? 3. If conflicts occur, how are they resolved?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 27.

785

9/15/05 2:01:10 PM

SECTION 1

BEFORE YOU

READ

Main Idea

The partnership form of business organization has unique features.

Read to Learn… ➤ the characteristics of a

partnership. (p. 786) ➤ how to account for equity in a partnership. (p. 787)

Key Terms

partnership agreement mutual agency

AS YOU

READ

Instant Recall Other Forms of Organization A sole proprietorship is owned by one person. A corporation is owned by any number of people and is a separate entity for legal purposes.

786

Partnership Characteristics and Partners’ Equity As you learned in Chapter 2, a partnership is an association of two or more persons as co-owners to operate a business for profit. Any type of business may be organized as a partnership, but it is more common for those providing professional services such as accounting and legal firms.

Characteristics of a Partnership What Are the Characteristics of a Partnership? The partnership organizational form has certain unique features.

Ease of Formation No special legal requirements must be met to form a partnership. A Voluntary Arrangement. A partnership is formed when two or more persons agree to operate as partners. No one can be forced into a partnership or required to continue as a partner. The Partnership Agreement. A partnership may be formed when two or more individuals verbally agree to operate a business as co-owners. However, it is advisable to have a partnership agreement in writing that states the terms under which the partnership will operate. It should include (1) each partner’s name and address; (2) the name, location, and nature of the partnership; (3) the agreement date and the length of time the partnership is to exist; (4) each partner’s investment; (5) each partner’s duties, rights, and responsibilities; (6) the amount of withdrawals allowed each partner; (7) the procedure for sharing profits and losses; and (8) the procedures to follow when the partnership ceases to exist. Each partner should sign the agreement.

Unlimited Liability Each partner is personally liable for the partnership’s debts. This means that if the assets of the partnership cannot pay its creditors, the partners’ personal assets may be used to pay those debts.

Limited Life A partnership may end for a number of reasons, including any partner’s death, withdrawal, bankruptcy, or incapacity. It may also end upon the completion of the project for which the partnership was formed, or at the expiration of the time set by the partners. For example, two architects may agree to combine their talents to design and oversee the construction of a building. When the building is completed, the partnership is dissolved.

Chapter 27 Introduction to Partnerships

784-805_CH27_868829.indd 786

4/6/06 6:46:33 PM

Mutual Agency Each partner is an agent of the partnership. In other words any partner has the legal right, in the name of the firm, to enter into agreements that are binding on all other partners. This is known as mutual agency .

Co-ownership of Partnership Property

AS YOU

READ

In Your Own Words Partnership Explain what a partnership is in your own words.

When a partner invests assets in the partnership, he or she gives up all personal rights of ownership. The partners co-own all partnership assets.

Advantages and Disadvantages of a Partnership A partnership combines the abilities, experiences, and resources of two or more individuals. It is easy to form and requires only the partners’ agreement. Partners can usually make decisions without meeting formally. A partnership must have a legal purpose but has few other restrictions. Finally, it does not pay federal or state income taxes because each partner pays personal income taxes on his or her share of the net income of the business. Of course, a partnership has disadvantages. It has a limited life, each partner is personally liable for the partnership’s debts, and all partners may be held responsible for one partner’s decisions. A partner cannot transfer his or her partnership interest without the other partners’ consent. The partners need to be able to work together without major disagreements.

Accounting for Partners’ Equity How Do You Account for a Partnership? Accounting for owner’s equity for a partnership is basically the same as for a sole proprietorship. A sole proprietorship has only one capital account, but a partnership has two or more capital accounts. A separate capital account is set up for each partner to record that partner’s investment in the business. Each partner also has a separate withdrawals account.

Recording Partner Investments When a partnership is formed, the value of cash and other assets invested by each partner is listed in the partnership agreement. Separate entries then record each partner’s investment in the business. Let’s look at an example. On January 1 Molly Gill and Don Putman agree to form a partnership to operate a business. The name of the partnership is Surfside Bike & Skate Rentals. Each partner agrees to invest the following assets in the new business.

Gill Cash Office supplies Office equipment (market value) Building (market value) Land Total assets invested

$30,000 15,000 $45,000

AS YOU

READ

Key Point Partnership Accounts A partnership has separate capital and withdrawals accounts for each partner.

Putman $12,000 1,000 12,000

$25,000

When assets other than cash are invested in a partnership, the asset accounts are debited for the market value of the assets.

Section 1 Partnership Characteristics and Partners’ Equity

784-805_CH27_868829.indd 787

787

9/15/05 2:02:56 PM

B u s i n e s s Tr a n s a c t i o n On January 1 Molly Gill and Don Putman contributed cash and other assets to form a partnership, Memorandum 1. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2

20-Jan.

3 4 5 6 7 8 9 10

DESCRIPTION

POST. REF.

PAGE DEBIT

1

CREDIT 1

1 Building Land Molly Gill, Capital Memorandum 1 1 Cash in Bank Office Supplies Office Equipment Don Putman, Capital Memorandum 1

3 0 0 0 0 00 15 0 0 0 00

2 3

4 5 0 0 0 00

5

1 2 0 0 0 00 1 0 0 0 00 1 2 0 0 0 00

6 7 8

2 5 0 0 0 00

READ

Key Point Partnership Investments A partner’s investment of noncash assets is recorded at the market value of the assets.

9 10

11

AS YOU

4

11

Recording Additional Partner Investments Any additional investments by the partners are recorded in a similar manner. For example, in April each partner agreed to invest $5,000 cash in the business. Cash in Bank is debited for $10,000 and the two partners’ capital accounts are credited for $5,000 each.

Recording Partner Withdrawals Because partners do not receive a salary, they may withdraw cash or other assets for personal use during the year. The withdrawal amounts must follow the terms of the partnership agreement. The amount is debited to the partner’s withdrawals account and is credited to the appropriate asset account.

B u s i n e s s Tr a n s a c t i o n On May 12 Molly Gill withdrew $1,800 cash for personal use, Check 123, and Don Putman withdrew $1,200 cash for personal use, Check 124. JOURNAL ENTRY

GENERAL JOURNAL DATE 1 2 3 4 5 6 7

788

DESCRIPTION

20-May 12 Molly Gill, Withdrawals Cash in Bank Check 123 Don Putman, Withdrawals Cash in Bank Check 124

POST. REF.

PAGE DEBIT

36

CREDIT 1

1 8 0 0 00

2

1 8 0 0 00

3 4

1 2 0 0 00

5

1 2 0 0 00

6 7

Chapter 27 Introduction to Partnerships

784-805_CH27_868829.indd 788

9/15/05 2:03:00 PM

Assessment

SECTION 1 AFTER YOU

READ

Reinforce the Main Idea The partnership form of business organization is different from the other forms you have studied. Make a chart like this one and fill in the blanks with a short definition of each partnership characteristic.

#(!2!#4%2)34)#3/&!0!24.%23()0

%ASEOF&ORMATION

5NLIMITED,IABILITY

,IMITED,IFE

-UTUAL!GENCY

#O OWNERSHIPOF 0ARTNERSHIP0ROPERTY

Do the Math A partnership has two partners. Assume that assets total $123,400, liabilities are $18,700, and partner A has a capital balance of $63,234. What is the capital balance of partner B?

Problem 27–1 Recording Partners’ Investments On June 1 Matthew Deck and Jennifer Rusk agree to combine their sole proprietorships into a new business, Dreamscapes Catering, organized as a partnership. The partnership will take over all assets of the two proprietorships. The assets invested by Deck and Rusk follow.

Instructions Prepare the journal entries required to record the investment by each partner. Use page 1 of the general journal in your working papers. The source document is Memorandum 1. Investments Cash Accounts receivable Merchandise Equipment Van Office Furniture

Deck $ 1,200 2,000 8,000 5,000 12,000 1,000

Rusk $ 2,300 7,000 5,000 12,000 — 500

Section 1 Partnership Characteristics and Partners’ Equity

784-805_CH27_868829.indd 789

789

9/15/05 2:03:04 PM

SECTION 2

BEFORE YOU

READ

Main Idea

Partners divide profits and losses in several different ways.

Read to Learn… ➤ how to divide net income

and net loss equally. (p. 790) ➤ how to divide net income and net loss on a fractional basis. (p. 791) ➤ how to divide net income and net loss based on capital investments. (p. 793)

Division of Income and Loss At the end of each accounting period, the net income or net loss from partnership operations is divided among the partners. Partners may divide the income or loss among themselves in any way they choose. The specific method should be defined in the partnership agreement. If it is not, the law provides that net income or net loss be divided equally among the partners. There are many ways for partners to divide profits and losses. The division of profits and losses is generally based on the services and capital contributed by the partners to the partnership. For example, if the partners share equally in the work of the business, but one partner has invested more capital, it seems only fair that the one who has invested more should profit more. When the profits of the accounting period are divided, each partner’s capital account is increased. If the business incurs a net loss for the accounting period, the capital account of each partner is decreased. A number of methods can be used to distribute partnership profits or losses. We consider three of these methods: • • •

equal basis fractional share basis capital investment basis

We will look at two examples for Surfside Bike & Skate Rentals for each method: a net income of $24,000 and a net loss of $12,000.

Dividing Profits and Losses Equally AS YOU

READ

Key Point Distribution of Net Income or Net Loss If the partnership agreement does not explain how net income or net loss is to be distributed, it is divided equally among the partners.

790

What Is the Journal Entry to Divide Income or Loss Equally? The easiest way to divide a partnership’s net income or net loss is on an equal basis. This method is often used when all partners invest equal amounts of capital and share equally in the work of the business. The partnership agreement for Surfside Bike & Skate Rentals states that the profits or losses are to be divided between the two partners equally. During the first year of operation, the partnership earned a net income of $24,000. Each partner’s share is $12,000 ($24,000
2). Remember that the balance of the Income Summary account is the net income or net loss for the period. In the third closing entry, Income Summary is closed to capital. On December 31 the balance of Income Summary, a $24,000 credit, is divided equally between the two partners.

Chapter 27 Introduction to Partnerships

784-805_CH27_868829.indd 790

9/15/05 2:03:09 PM

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

PAGE

POST. REF.

DEBIT

20-Closing Entries Dec. 31 Income Summary Molly Gill, Capital Don Putman, Capital

66

CREDIT 1

24 0 0 0 00

2

1 2 0 0 0 00 1 2 0 0 0 00

3 4

After the journal entry has been posted, the balance of Molly Gill’s capital account is $62,000 and the balance of Don Putman’s capital account is $42,000. Molly Gill, Capital Debit 

Don Putman, Capital

Credit  Bal. 50,000 Clos. 12,000 Bal. 62,000

Credit  Bal. 30,000 Clos. 12,000 Bal. 42,000

Debit 

If the partnership incurs a net loss of $12,000 for the period, each partner’s share of the net loss is $6,000 ($12,000
2). On December 31 the balance of Income Summary, a $12,000 debit, is divided equally between the two partners. GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

20-Closing Entries Dec. 31 Molly Gill, Capital Don Putman, Capital Income Summary

PAGE

POST. REF.

DEBIT

CREDIT 1 2 3

1 2 0 0 0 00

READ

In Your Experience

66

6 0 0 0 00 6 0 0 0 00

AS YOU

4

Partnership Have you, a friend, or a family member ever done business with a partnership?

After the journal entry has been posted, the balance of Molly Gill’s capital account is $44,000 and the balance of Don Putman’s capital account is $24,000. Molly Gill, Capital Debit  Clos. 6,000

Credit  Bal. 50,000 Bal. 44,000

Don Putman, Capital Debit  Clos. 6,000

Credit  Bal. 30,000 Bal. 24,000

Dividing Profits and Losses on a Fractional Share Basis How Do You Compute and Record Profit or Loss Based on Fractions? Another way to divide net income or net loss is to assign each partner a stated fraction of the total. The size of the fraction usually depends on (1) the amount of each partner’s investment and (2) the value of each partner’s services to the business. Section 2 Division of Income and Loss

784-805_CH27_868829.indd 791

791

9/15/05 2:04:09 PM

Suppose that the Surfside Bike & Skate Rentals partnership agreement states that the net income or net loss is to be divided between the two partners on the following basis: • •

Gill, two-thirds Putman, one-third

When partners agree to share net income or net loss on a fractional share basis, that basis is often stated as a ratio. For example, Molly Gill’s two-thirds share and Don Putman’s one-third share could be expressed as a 2:1 ratio (2 to 1). To turn a ratio into a fraction, add the figures and use the total as the denominator of the fraction. In this particular example, the ratio is converted to fractions as follows:

2:1
( 2  1
3)
2⁄ 3 and 1⁄3 The division of the $24,000 net income based on a 2:1 ratio is calculated as follows:

Gill’s share: Putman’s share:

$24,000  2⁄3
$16,000 $24,000  1⁄ 3
$8,000

The December 31 closing entry follows:

GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

20-Closing Entries Dec. 31 Income Summary Molly Gill, Capital Don Putman, Capital

PAGE

POST. REF.

DEBIT

66

CREDIT 1

24 0 0 0 00

2

16 0 0 0 00 8 0 0 0 00

3 4

After the journal entry has been posted, the balance of Molly Gill’s capital account is $66,000 and the balance of Don Putman’s capital account is $38,000. Refer to the following T account for each of the partners. Molly Gill, Capital Debit 

Credit  Bal. 50,000 Clos. 16,000 Bal. 66,000

Don Putman, Capital Debit 

Credit  Bal. 30,000 Clos. 8,000 Bal. 38,000

If the partnership incurs a net loss of $12,000 for the period, the December 31 distribution to the partners based on a 2:1 ratio is calculated as follows:

Gill’s share: Putman’s share:

792

($12,000)  2⁄3
($8,000) ($12,000)  1⁄3
($4,000)

Chapter 27 Introduction to Partnerships

784-805_CH27_868829.indd 792

9/15/05 2:04:21 PM

On December 31 the partnership makes the following closing entry: GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

POST. REF.

DEBIT

20-Closing Entries Dec. 31 Molly Gill, Capital Don Putman, Capital Income Summary

Fractions, Decimals, and Percents

66

CREDIT 1

8 0 0 0 00 4 0 0 0 00

2 3

1 2 0 0 0 00

Molly Gill, Capital Debit  Clos. 8,000

PAGE

4

Don Putman, Capital

Credit  Bal. 50,000 Bal. 42,000

Debit  Clos. 4,000

MATH HINTS

Credit  Bal. 30,000 Bal. 26,000

After the journal entry has been posted, the balance of Molly Gill’s capital account is $42,000 and the balance of Don Putman’s capital account is $26,000.

• To change a fraction to a decimal, divide the numerator by the denominator. 3/8  0.375 • To change a decimal to a percent, move the decimal point two places to the right and add the percent symbol. 0.375  37.5% • To change a percent to a fraction, replace the percent symbol with 1/100. 37.5%  37.5(1/100)  37.5/100

Dividing Profits and Losses Based on Capital Investments How Do You Use Capital Investment to Divide Profit or Loss? Net income and net loss can also be divided on the basis of the amount of capital contributed by the individual partners. To do this, compute the percentage of each partner’s capital investment as follows:

Individual Partner’s Investment
Partner’s Percentage Total Partnership Investment Then multiply the net income or net loss by each partner’s percentage. Molly Gill and Don Putman made the following capital investments:

Molly Gill Don Putman Total investment

$50,000 $30,000 $80,000

Gill’s Percentage 50,000
62.5% 80,000

Putman’s Percentage 30,000
37.5% 80,000

The share of the $24,000 net income for each partner is calculated as follows:

Gill’s share Putman’s share

$24,000  .625
$15,000 $24,000  .375
$9,000

Section 2 Division of Income and Loss

784-805_CH27_868829.indd 793

793

9/15/05 2:04:24 PM

On December 31 the partnership makes the following closing entry: GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

PAGE

POST. REF.

DEBIT

20-Closing Entries Dec. 31 Income Summary Molly Gill, Capital Don Putman, Capital

66

CREDIT 1

24 0 0 0 00

2

1 5 0 0 0 00 9 0 0 0 00

5

3 4 5

Molly Gill, Capital Debit 

Don Putman, Capital

Credit  Bal. 50,000 Clos. 15,000 Bal. 65,000

Credit  Bal. 30,000 Clos. 9,000 Bal. 39,000

Debit 

After the journal entry has been posted, the balance of Molly Gill’s capital account is $65,000 and the balance of Don Putman’s capital account is $39,000. If the partnership incurs a net loss of $12,000 for the period, the December 31 distribution is calculated as follows:

Gill’s share Putman’s share

($12,000)  .625
($7,500) ($12,000)  .375
($4,500)

On December 31 the closing entry is as follows: GENERAL JOURNAL DATE 1 2 3 4

DESCRIPTION

20-Closing Entries Dec. 31 Molly Gill, Capital Don Putman, Capital Income Summary

POST. REF.

PAGE DEBIT

66

CREDIT 1

7 5 0 0 00 4 5 0 0 00

2 3

1 2 0 0 0 00

5

4 5

After the journal entry has been posted, the balance of Molly Gill’s capital account is $42,500, and the balance of Don Putman’s capital account is $25,500. Molly Gill, Capital Debit  Clos. 7,500

794

Credit  Bal. 50,000 Bal. 42,500

Don Putman, Capital Debit  Clos. 4,500

Credit  Bal. 30,000 Bal. 25,500

Chapter 27 Introduction to Partnerships

784-805_CH27_868829.indd 794

9/15/05 2:04:35 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Identify two facts about the methods of dividing partnership profits and losses covered in this section. Use a chart like this one to organize the information.

-ETHODOF$IVIDING0ROFITSAND,OSSES

&ACT

&ACT

Do the Math You and your best friend, Mary Jo Perry, operate an ice cream kiosk at the local outdoor shopping mall. You agree to divide profits and losses based on the capital investments made by each partner. Calculate the share of profit and loss due to each partner. Your investment Mary Jo Perry’s investment Net income

$15,000 25,000 32,000

1. What is the percentage of investment by each partner? 2. What is your share of the profit? 3. If there is a loss, which partner will have the largest share of the loss?

Problem 27–2 Determining Partners’ Fractional Shares Following are the ratios used by several partnerships to divide net income or net loss.

Instructions Determine the fractions that are used to calculate each partner’s share of net income or net loss. Use the form provided in your working papers.

    

Problem 27–3 Analyzing a Source Document The deposit slips for Mr. Walter’s and Ms. Yount’s investments in the partnership of Walter and Yount Tax Service are presented here.

Instructions Prepare a journal entry to record the investments by the partners. Use the journal provided in your working papers.

    

Date November 13

20 --

Checks and other items are received for deposit subject to the terms and conditions of this bank's collection agreement.

      200 Market Square Rockford, Alabama 35136

BE SURE EACH ITEM IS ENDORSED

4. 2:1:1 5. 2:1

DOLLARS

    

    

Date November 13

20 --

Checks and other items are received for deposit subject to the terms and conditions of this bank's collection agreement.

      200 Market Square Rockford, Alabama 35136

01100653456 450987

CHECKS (List Singly) 1 2

234/67 Walter

8,000 00

3 4 5 6 7 8

TOTAL

8,000 00 DOLLARS

CENTS

CASH CHECKS (List Singly) 1 2

234/89 Yount

12,000 00

3 4 5 6 7 8

TOTAL

12,000 00

Section 2 Division of Income and Loss

784-805_CH27_868829.indd 795

CENTS

CASH

01100653456 450987 BE SURE EACH ITEM IS ENDORSED

1. 3:1 2. 5:3:1 3. 3:2:2:1

795

4/6/06 6:46:55 PM

Summary

CH A P T ER 2 7 Key Concepts

1. A partnership is an association of two or more persons to operate, as co-owners, a business for profit. The actions of one partner acting on behalf of the partnership are binding on all partners. Partnership characteristics include: • • • • •

the ease of formation unlimited liability for the partnership’s debts limited life mutual agency co-ownership of partnership property

Advantages include: • • • •

brings together abilities, experiences, and resources of two or more individuals requires only the partners’ agreement to form allows one or more partners to make decisions without a formal meeting of all partners does not pay federal or state income taxes; each partner pays taxes on his or her share of the net income of the business

Disadvantages include: • • • • •

limited life personal liability for partnership debts responsibility for actions of other partners restriction of transfer of a partner’s interest without permission of other partners potential for disagreements between partners

It is advisable to have a partnership agreement signed by each partner that states the following in writing: • • • • • • • •

each partner’s name and address the name, location, and nature of the partnership the agreement date and the length of time the partnership is to exist each partner’s investment each partner’s duties, rights, and responsibilities the amount of withdrawals allowed each partner the procedure for sharing profits and losses the procedures to follow when the partnership ceases to exist

2. Accounting for a partnership involves recording partners’ original and subsequent investments in separate capital accounts and recording partners’ withdrawals in separate withdrawals accounts. Partner 1, Capital Debit 

796

Credit  xxx

Partner 1, Withdrawals Debit  xxx

Credit 

Partner 2, Capital Debit 

Credit  xxx

Partner 2, Withdrawals Debit  xxx

Credit 

Chapter 27 Summary

784-805_CH27_868829.indd 796

9/15/05 2:04:50 PM

Summary

CHAPT E R 27

3. The formation of a partnership involves recording the value of cash and other assets that each partner invests. To record a partner’s investment in a partnership: Cash in Bank (or other asset) Debit  xxx

Credit 

Individual Partner’s Capital Debit 

Credit  xxx

4. The terms of a partnership agreement should determine how partners may withdraw cash or assets from the business. To record a partner’s cash withdrawal from the partnership: Individual Partner’s Withdrawals Debit  xxx

Credit 

Cash in Bank Debit 

Credit  xxx

5. The net income or net loss of a partnership is divided among the partners according to the terms set forth in the partnership agreement. The division is usually based on the contribution of services and capital by the partners. The division may be determined • on an equal basis • on a fractional share basis • on the basis of investment Dividing profits among partners: Individual Partner’s Capital Debit 

Credit  xxx

Income Summary Debit

Credit

xxx

Dividing losses among partners: Individual Partner’s Capital Debit  xxx

Credit 

Income Summary Debit

Credit xxx

Key Terms mutual agency

(p. 787)

partnership agreement

(p. 786)

Chapter 27 Summary

784-805_CH27_868829.indd 797

797

9/15/05 2:04:55 PM

C H A P T ER 2 7 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

Partnership Form of Organization a. List five characteristics of a partnership. b. List three advantages and three disadvantages of the partnership form of business. Partnership Accounting a. What information is usually included in a partnership agreement? b. How does accounting for a partnership differ from that for a sole proprietorship? Partnership Investments a. When assets other than cash are invested in a partnership, at what amount are the assets recorded? b. What is the journal entry to record a partner’s investment of cash? Partnership Withdrawals a. What accounts are affected when a partner withdraws cash for personal use? b. What determines the amount of cash or other assets a partner may withdraw from the business for personal use? Allocation of Profits and Losses a. What factors do partners usually consider when deciding on how the profits and losses of the partnership will be divided? b. Name three methods partners might use to divide profits and losses.

Apply Key Terms You and your friend Marianne Shelton have discussed forming a partnership to provide desktop publishing and layout services to local businesses. You have chosen a business name: The Perfect Paper. You are ready to launch your business idea, but you need Marianne to agree so that you can obtain a business loan. Using the terms listed here, write a letter to Marianne and formally invite her to join you in this venture. mutual agency partnership agreement

798

Chapter 27 Review and Activities

784-805_CH27_868829.indd 798

9/15/05 2:05:00 PM

Computerized Accounting

CHAPT E R 27

Starting a New Company Making the Transition from a Manual to a Computerized System Task

Manual Methods

Computerized Methods

Starting a new company

• Determine the form of business ownership. • Create a chart of accounts. • Open a general ledger account for each account. • Record the journal entry for the initial investment by the owner(s). • Post the opening entry to the appropriate ledger accounts.

• Use the new company setup guide offered with most computerized accounting systems. • Follow the steps that will prompt you to enter general information about the business, as well as specific information about the accounting records.

Q&A Peachtree Question What information will I enter in the New Company Setup wizard?

Answer • • • • • • •

Company information Chart of accounts Accounting method Posting method Accounting periods Defaults Beginning balances

QuickBooks Q & A QuickBooks Question What information will I enter in the new company EasyStep Interview?

Answer • • • • •

Company information Fiscal year start date Company preferences Chart of accounts Opening balances

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 27 Computerized Accounting

784-805_CH27_868829.indd 799

799

9/15/05 2:05:20 PM

Problems

C H A P T ER 2 7 Complete problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 27–5 1. Select the spreadsheet template for Problem 27–5. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 27–4 Dividing Partnership Earnings Listed here are the net income and the method of dividing net income or net loss for several partnerships.

Instructions Use the form provided in your working papers to determine each partner’s share of the net income. Net Income 1. $45,000 2. $89,700 3. $22,000 4. $32,000 5. $92,700

Analyze

Method of Dividing Partnership Earnings Equally: 2 partners Fractional share: 2/3, 1/3 Fractional share: 3:1 Fractional share: 2/5, 2/5, 1/5 Equally: 3 partners

Identify the accounts affected when net income is distributed to the partners.

Problem 27–5 Calculating the Percentage of a Partner’s Capital Investment Listed here are an individual partner’s investments for several partnerships.

SMART GUIDE Step–by–Step Instructions: Problem 27–6 1. Select the problem set for JR Landscaping (Prob. 27–6). 2. Rename the company, change the accounting period to May 1– May 31, 2010 and set the system date. 3. Enter the transactions to record the investment by each partner using the General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Complete the Analyze activity. 6. End the session.

800

Instructions Using the form provided in your working papers, calculate Partner A’s percentage ownership in each partnership. Partnership Partner A’s Investment Total Partnership Investment 1. $60,000 $180,000 2. 25,000 125,000 3. 11,250 28,125 4. 30,000 40,000

Analyze

Calculate the percentage of ownership for the other partner(s) in partnerships 1 and 4.

Problem 27–6 Recording Investments of Partners On May 1 Jason Pua and Roy Nelson formed the partnership called JR Landscaping. Jason contributed $8,100 cash and all of his landscaping equipment. Jason had purchased the equipment for $2,500 last year. The market value of this equipment is now $1,800. Roy contributed $1,000 cash and his truck to the partnership. The truck currently has a market value of $5,600.

Chapter 27 Problems

784-805_CH27_868829.indd 800

4/6/06 6:47:07 PM

Problems

CHAPT E R 27

Instructions Prepare the journal entries required to record the investment that each partner contributed in creating the partnership. Use page 1 of the general journal in your working papers. The source document for this assignment is Memorandum 1.

Analyze

SMART GUIDE Step–by–Step Instructions: Problem 27–7 1. Select the problem set for In Shape Fitness (Prob. 27–7). 2. Rename the company and set the system date. 3. Record the entry to divide the loss between the two partners using the General Journal Entry option. 4. Print a General Journal. 5. Complete the Analyze activity. 6. End the session.

Compare the balance of Jason Pua’s capital account with the capital account of Roy Nelson.

Problem 27–7 Sharing Losses Based on Capital Balances Mariela DeJesus and Natasha Faircloth started the partnership In Shape Fitness. Mariela contributed a capital balance of $35,000. Natasha’s capital contribution totaled $45,000. Their partnership agreement specified sharing net profits and net losses on the basis of their capital balances. The net loss for their first year of operation for In Shape Fitness was $28,500.

QuickBooks

Instructions Prepare the journal entry required to divide the net loss

PROBLEM GUIDE

between the partners. Use the journal in your working papers to record your entry.

Analyze

Step–by–Step Instructions: Problem 27–7

If Mariela took a $1,500 withdrawal, what was her capital account balance on December 31 after the closing entries were posted?

Problem 27–8 Partners’ Withdrawals Toni Graff, Ahmad Nu, and Lindsay Pane are partners in Travel Essentials. Their partnership agreement stated that withdrawals would be 10 percent for each partner based on the partnership’s net profits or net losses recorded for the year. In the first year of operation, the partnership reported $25,000 in net profit.

Instructions Prepare the entry to record the withdrawals of Graff, Nu, and Pane based on the partnership agreement. Use the journal paper provided in your working papers.

Analyze

Explain how the $25,000 in profit would be shared among Graff, Nu, and Pane.

1. Restore the Problem 27-7.QBB file. 2. Record the entry to divide the loss between the two partners using the Make General Journal Entries option. 3. Print a Journal report. 4. Complete the Analyze activity. 5. Back up your work.

SMART GUIDE Step–by–Step Instructions: Problem 27–8 1. Select the problem set for Travel Essentials (Prob. 27–8). 2. Rename the company and set the system date. 3. Enter the transactions to record the partners’ withdrawals. 4. Print a General Journal. 5. Complete the Analyze activity. 6. End the session.

Chapter 27 Problems

784-805_CH27_868829.indd 801

801

9/15/05 2:05:27 PM

Problems

C H A P T ER 2 7 QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 27–8 1. Restore the Problem 27-8.QBB file. 2. Enter the transaction to record the partners’ withdrawals using the Make General Journal Entries option. 3. Print a Journal report. 4. Complete the Analyze activity. 5. Back up your work.

Problem 27–9 Preparing Closing Entries for a Partnership Barbara Scott and Martin Towers are partners in the firm of Ten Column Accounting Services. Their partnership agreement states that Scott and Towers share net income or net loss in a 3:2 ratio. At the end of the period, December 31, the business had a net loss of $9,700. During the period Scott withdrew $6,600 and Towers withdrew $5,400.

Instructions In your working papers, do the following: 1. Journalize the closing entries to divide the net loss between the partners and to close the withdrawals accounts. Use general journal page 14. 2. Post the closing entries to the general ledger accounts.

Analyze

Calculate the reductions in the Scott and Towers capital accounts.

SMART GUIDE Step–by–Step Instructions: Problem 27–9 1. Select the problem set for Ten Column Accounting Services (Prob. 27–9). 2. Rename the company and set the system date. 3. Record the entry to divide net loss between partners using General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Complete the Analyze activity. 6. End the session.

Problem 27–10 Evaluating Methods of Dividing Partnership Earnings

CHALLENGE PROBLEM

Jo Garrity, Maureen O’Riley, and David White decided to form a partnership called OnTime Copy Shop. The partners will invest the following assets in the business: Cash Supplies Equipment Building Land

Garrity 0 0 0 $50,000 15,000

O’Riley $22,000 5,000 7,500 0 0

White $40,000 2,000 4,000 0 0

They are considering the following plans for the division of net income or net loss: 1. Equally 2. Garrity, 20%; O’Riley, 40%; White, 40% 3. In the same ratio as the beginning balances of their capital accounts

Instructions Assume that the business had a net income of $17,500 in its first year of operations. Calculate the division of net income under each of the three plans.

Analyze

802

Identify which method O’Riley would prefer and why.

Chapter 27 Problems

784-805_CH27_868829.indd 802

4/6/06 6:47:09 PM

Winning Competitive Events

CHA PTER 27

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. The drawing account shows each partner’s a. withdrawal of cash only. b. withdrawal of all assets. c. additional investments. d. all of the above. e. none of these answers 2. The right of all partners to contract for a partnership is called a. mutual agency. b. a partnership. c. a partner’s agreement. d. voting rights. e. none of these answers 3. Assume that Bernard’s Novelty is a partnership. Which transaction would occur if Partner A withdraws cash for personal use to purchase an automobile? a. Debit Salary Expense and credit Cash b. Debit Cash and credit Partner A, Withdrawal c. Debit Partner A, Withdrawal and credit Cash d. Debit Capital and credit Cash 4. If a partner invests a noncash asset in the partnership, the amount to be debited and credited would be a. the asset’s cost. b. the asset’s book value. c. the asset’s current market value. d. an amount determined by the investing partner.

Business Professionals of America MULTIPLE CHOICE 5. Rewrite: 3/5 as a decimal. a. 1.67 b. .4 c. .6 d. .0167

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 27. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

784-805_CH27_868829.indd 803

Chapter 27 Winning Competitive Events

803

10/13/05 11:57:29 PM

C H A P T ER 2 7 Critical Thinking

Introduction to Partnerships

CASE

STUDY

Partnership: Dentists

ETHICS

Partner Loyalty

a mattoefr

))

$ )) Communicating ACCOUNTING

804

Real-World Applications and Connections

1. Name three methods partners can use to divide net income and net loss. 2. Explain what mutual agency means in terms of a partnership. 3. Three people form a partnership. A invests $10,000; B, $25,000; and C, $35,000. If they share net income of $100,000 based on their original investments, what is the profit sharing ratio, and how much would each partner receive? 4. Explain the purpose of withdrawals accounts for a partnership. 5. Analyze what you believe to be the most important advantage and disadvantage of the partnership form of organization. 6. Defend the statement that a partnership agreement is advisable. Arturo Garcia and Marcela Melendez are partners in Family Dental Center. They share equally the income and the costs of office rent, utilities, insurance, and salaries for the four people who work for them. You just graduated from dental school. Arturo and Marcela offer you a partnership in their practice. Since you lack their years of experience, they offer you a 20 percent interest in return for a $40,000 investment. INSTRUCTIONS 1. Assume that the revenue for the dental practice averages $10,000 a week. If you become a partner, you could generate additional revenue of $3,500 a week. Compute your 20 percent share of the income. 2. Compute your share of the expenses if total weekly expenses are $6,000. 3. Do you think that the 20% interest return in the partnership is a good deal? Would you negotiate a different arrangement? Explain. You and your best friend Harold have started a jewelry business. He manages the business while you make the jewelry. Your designs are very successful, but because of Harold’s mismanagement, the business is not making any money. He suggests “doctoring” the financial statements and using them to raise capital from other investors. You are afraid that the business will not grow as long as Harold is running it, but he is a good friend and has some good ideas. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Creating a Partnership Agreement Choose a classmate and discuss a partnership for a business the two of you might like to own and operate. Use your creativity. Prepare a partnership agreement that spells out the details. Include information about what each partner will contribute to the business. Be sure to sign the agreement to make it legal and binding.

Chapter 27 Real-World Applications and Connections

784-805_CH27_868829.indd 804

9/15/05 2:05:36 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Negotiating Two of your friends own The Gold Medal, a sports restaurant. They may have to close it because, as partners, they disagree about expanding. INSTRUCTIONS 1. Acting as a mediator, role-play the partners’ conflict with two classmates. Have them discuss their expansion disagreement. 2. Write down all the problems they mention and possible solutions for each. 3. Present your solutions, and help the partners decide whether to expand.

Joint Ventures One way a company can increase sales is to enter a foreign market in a joint venture with a local firm. The two companies share capital, technology, risks, rewards, and control. The local company offers cultural knowledge and business contacts. Joint ventures require a lower investment than other entry methods, but control is diluted and they can be difficult to manage. INSTRUCTIONS Brainstorm factors to consider before forming a joint venture.

Your Entrepreneurial Traits Entrepreneurs recognize and meet the needs of the business world. They must organize, manage, and assume risks. If you plan to be a sole proprietor, partner, or corporate executive, you will need the same traits. PERSONAL FINANCE ACTIVITY Microsoft’s Bill Gates and TV executive and personality Oprah Winfrey are two well-known entrepreneurs. List the characteristics you think made them successful. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 27.

Analyzing Partners’ Equity The net income or net loss from a partnership represents a return on the equity the partners invested in the business. Return on equity states a company’s net profit or net loss as a percentage of equity. To compute it, divide net income by equity. Partners may invest different amounts of equity, so each partner’s return may be different. Evolution of a INSTRUCTIONS Use the beginning balances in Business the T accounts for Putman and Gill on page 792 Some large corporations to complete these tasks. started as partnerships. Visit 1. If total net income is $24,000, calculate the glencoeaccounting return on total partnership equity. .glencoe.com and click on Student Center. Click on 2. Using an equal split of net income, calculate WebQuest and select Unit 6 to the return on each partner’s equity. continue your Internet project. 3. Which partner earned the better return? Explain why. Why is this percentage different than the return on total equity?

glencoeaccounting.glencoe.com

784-805_CH27_868829.indd 805

CHAPT E R 27

Chapter 27 Real-World Applications and Connections

805

9/15/05 2:05:44 PM

CH A P T ER 2 8

Financial Statements and Liquidation of a Partnership

What You’ll Learn

BEFORE YOU

1.

Prepare an income statement for a partnership.

Predict

2.

Prepare a statement of changes in partners’ equity.

3.

Prepare the Partners’ Equity section of a balance sheet.

4.

Account for partnership liquidation losses.

5.

Account for partnership liquidation gains.

EVALUATING PARTNERSHIP FINANCIAL STATEMENTS

6.

Prepare the final entry to liquidate a partnership.

King & King, Architects, LLP

7.

Define the accounting terms introduced in this chapter.

Why It’s Important ▲

Partners’ equity receives specific treatment on financial statements and at the termination of a business.

1. 2. 3. 4.

READ

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business

How can a 19th century business express itself in the 21st century? Founded in 1868 by Archimedes Russell, King & King Architects, LLP, is the oldest architectural firm in New York state. Specializing in highly technical spaces like labs, media centers, and intensive care units, King & King also designs hospitals, schools, and shopping centers. When a partnership like King & King begins a new project, it evaluates the costs and decides how much to charge for its services. Aging buildings and an increase in enrollment make school projects a significant portion of the firm’s business. Since 1990, King & King has grown from a staff of 25 to more than 65, and seen a comparable increase in revenues.

What Do You Think? How do you think income is allocated among partners in a company like King & King?

806

Chapter 28 Financial Statements and Liquidation of a Partnership

806-825_CH28_868829.indd 806

9/15/05 2:10:52 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE In previous chapters you have learned how to prepare financial statements for a sole proprietorship and for a corporation. Preparing financial statements for a partnership is similar. In this chapter you will learn how to use partnership capital accounts in the preparation of financial statements and when a partnership business ceases its operations.

glencoeaccounting.glencoe.com

806-825_CH28_868829.indd 807

Personal Connection 1. If your workplace went out of business, what do you think would happen to the assets of the business? 2. What would happen to the debts?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 28.

807

9/15/05 2:11:03 PM

SECTION 1

BEFORE YOU

READ

Main Idea

Financial statements for a partnership report the details of each partner’s capital.

Read to Learn… ➤ how to prepare a

partnership income statement. (p. 808) ➤ how to prepare a statement of changes in partners’ equity. (p. 809) ➤ how to prepare the Partners’ Equity section of the balance sheet. (p. 809)

Key Terms

statement of changes in partners’ equity

Financial Statements for a Partnership At the end of the year, Deloitte & Touche LLP, one of The Big Four accounting firms, prepares its financial statements including an income statement, a statement of changes in partners’ equity, and a balance sheet. You will learn about these statements in this section.

The Income Statement What Does a Partnership Income Statement Report? A partnership’s income statement is prepared in the same way as that for any business. If the partnership is a service business, expenses are subtracted from revenue to determine the net income or loss. It is not required, but the division of net income or net loss among the partners may be shown on the income statement. The partnership agreement of Surfside Bike & Skate Rentals states that net income or net loss will be divided equally between the partners. At the end of the year, the firm had a net income of $24,000. Each partner’s share is $12,000. Figure 28–1 illustrates how to report the division of net income on the income statement. Surfside Bike & Skate Rentals Income Statement For the Year Ended December 31, 20--

Net Income Division of Net Income: Molly Gill Don Putman Net Income

24 0 0 0 00 12 0 0 0 00 12 0 0 0 00 24 0 0 0 00

Figure 28–1 Reporting the Division of Net Income on the Income Statement

808

Chapter 28 Financial Statements and Liquidation of a Partnership

806-825_CH28_868829.indd 808

9/15/05 2:13:02 PM

AS YOU

Surfside Bike & Skate Rentals Statement of Changes in Partners’ Equity For the Year Ended December 31, 20-Gill Beginning Capital, Jan. 1, 20-Add: Investments Net Income Subtotal Less: Withdrawals Ending Capital, Dec. 31, 20--

50 12 62 5 57

000 000 000 000 000

In Your Own Words

Putman 00 00 00 00 00

30 12 42 3 39

READ

000 000 000 000 000

Totals

00 80 0 0 0 00 24 0 0 0 00 104 0 0 0 8 000 00 00 96 0 0 0

00 00 00 00 00

Statement of Changes in Partners’ Equity Explain the purpose of the statement of changes in partners’ equity.

Figure 28–2 Statement of Changes in Partners’ Equity

The Statement of Changes in Partners’ Equity What Is Unique About Reporting Equity in a Partnership? The statement of changes in partners’ equity reports the change in each partner’s capital account resulting from business operations, investments, and withdrawals. It is similar to the statement of changes in owner’s equity for a sole proprietorship, except it has a separate column for each partner. See the statement of changes in partners’ equity for Surfside Bike & Skate Rentals in Figure 28–2. Notice that the net income is divided between the partners.

The Balance Sheet What Does a Partnership Balance Sheet Report? The owners’ equity section of the balance sheet for a partnership is called the Partners’ Equity section. This section lists each partner’s capital account separately. (See Figure 28–3.) The capital account amounts on the balance sheet are the ending capital amounts from the statement of changes in partners’ equity.

AS YOU

Surfside Bike & Skate Rentals Balance Sheet December 31, 20--

Partners’ Equity Molly Gill, Capital Don Putman, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

READ

Instant Recall

57 0 0 0 00 39 0 0 0 00 96 0 0 0 00 126 0 0 0 00

Characteristics of a Partnership The characteristics include ease of formation, unlimited liability, limited life, mutual agency, and co-ownership of partnership property.

Figure 28–3 The Partners’ Equity Section of the Balance Sheet

Section 1 Financial Statements for a Partnership

806-825_CH28_868829.indd 809

809

9/15/05 2:13:22 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea The financial statements for a partnership are the same as those for other forms of business except for items related to owners’ equity. Make a chart like this one to describe how partnership financial statements are different from those of a sole proprietorship.

$IFFERENCESIN0ARTNERSHIP&INANCIAL3TATEMENTS 34!4%-%.4

$)&&%2%.#%

)NCOME3TATEMENT 3TATEMENTOF#HANGESIN0ARTNERS%QUITY "ALANCE3HEET

Do the Math On January 1 Don had a capital balance of $23,000 and Ruth’s capital balance was $34,000. Compute each partner’s capital balance on December 31 given the following: • Net income of $28,000 is divided equally between the two partners. • Don withdrew $3,600. • Ruth withdrew $4,000.

Problem 28–1 Preparing the Income Statement and Balance Sheet for a Partnership Information related to the operations of the Goldman and Jones partnership follows.

Instructions In your working papers, prepare the Division of Net Income section of the income statement and the Partners’ Equity section of the balance sheet. 1. 2. 3. 4.

Goldman and Jones share profits in the ratio of 2:3. Net income for the year ended December 31, 20--, was $35,000. The January 1 capital balance for Goldman was $23,000. The January 1 capital balance for Jones was $47,000.

Problem 28–2 Analyzing a Source Document Instructions In your working papers or on a separate sheet of paper, determine each partner’s share of the gain.

810

N

Buie Norman & Company

CERTIFIED PUBLIC ACCOUNTANTS

Minutes of the PartnersÕ Meeting January 12, 20--

The partnership sold equipment for a gain of $26,400. The partners agreed to share the gain as follows: Larry Bass, CPA John Buie, CPA Teri Anderson, CPA Robert Norman, CPA Paula Dunham, CPA John Ruppe, CPA

6/22 6/22 3/22 3/22 2/22 2/22

Chapter 28 Financial Statements and Liquidation of a Partnership

806-825_CH28_868829.indd 810

9/15/05 2:13:34 PM

SECTION 2

Liquidation of a Partnership

A partnership does not have an unlimited life. Partnerships end because of death or incapacity of a partner, upon the completion of a project, or at the end of a specified time period. In this section you will learn about the procedures followed to end a partnership.

BEFORE YOU

READ

Main Idea

In a liquidation the assets are sold, creditors are paid, and any remaining cash is distributed to the partners.

Ending a Partnership What Is the Difference Between Dissolving and Liquidating? A partnership can be either dissolved or liquidated. Both are legal terminations of the partnership. A dissolution occurs when the partners change, but the partnership continues operations. For example, when a new partner is admitted, the partnership dissolves and a new partnership begins. A liquidation occurs when the business ceases to exist. The liquidation converts all partnership assets to cash and pays all partnership debts. The individual partners then are paid any remaining cash. The process involves four steps: 1. Sell all noncash assets for cash. 2. Add all gains (or deduct all losses) resulting from the sale of noncash assets to or from the capital accounts of the partners based on the partnership agreement. 3. Pay all partnership creditors. 4. After the creditors have been paid, distribute any cash remaining to the partners based on the final balance in their capital accounts.

Read to Learn… ➤ two types of legal

termination of a partnership. (p. 811) ➤ how to liquidate a partnership. (p. 811)

Key Terms dissolution liquidation

Liquidating Surfside Bike & Skate Rentals How Do You Liquidate a Partnership? Let’s explore the liquidation of the Surfside Bike & Skate Rentals partnership. Figure 28–4 on page 812 shows the balance sheet on the date the partners decided to end Surfside Bike & Skate Rentals. Molly Gill and Don Putman share profits and losses equally and agree to end the partnership based on the April 15 balance sheet. The liquidation requires converting all partnership assets to cash, paying all debts, and distributing the remaining cash to the partners. Ending the partnership required five transactions over a period of weeks.

Section 2 Liquidation of a Partnership

806-825_CH28_868829.indd 811

811

9/15/05 2:13:38 PM

AS YOU

READ

In Your Own Experience Liquidation of a Business Have you ever attended a “going-out-ofbusiness” sale? Explain how this sale uses a type of liquidation.

Surfside Bike & Skate Rentals Balance Sheet April 15, 20-Assets Cash in Bank Accounts Receivable Merchandise Inventory Equipment Less: Accumulated Depreciation

18 0 0 0 00 33 0 0 0 00 35 0 0 0 00 48 0 0 0 00 (8 0 0 0 00) 40 0 0 0 00 126 0 0 0 00

Total Assets Liabilities Note Payable Accounts Payable Total Liabilities

CULTURAL Diversity Personal Space

Personal space refers to the amount of space around a person that he or she needs to feel comfortable. This space varies among cultures. For example, Americans naturally stand about an arm’s length away from each other when talking. In Latin American countries, people stand very close and may find it rude if a person backs away while talking with them. Knowing about personal space can help prevent misunderstandings.

812

10 0 0 0 00 20 0 0 0 00 30 0 0 0 00

Partners’ Equity Molly Gill, Capital Don Putman, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

57 0 0 0 00 39 0 0 0 00 96 0 0 0 00 126 0 0 0 00

Figure 28–4 Surfside Bike & Skate Rentals Balance Sheet

Sale of Partnership Accounts Receivable at a Loss On April 20 Surfside sold its $33,000 in accounts receivable to a finance broker for $29,000. The receivables sale resulted in a $4,000 ($29,000
$33,000) loss to the partnership. Gill and Putman divided the loss equally. The following entry records the company’s sale of the receivables and loss distribution: GENERAL JOURNAL DATE 1 2 3 4 5 6

DESCRIPTION

20-Apr. 20 Cash in Bank Molly Gill, Capital Don Putman, Capital Accounts Receivable Receipt 341

7

POST. REF.

PAGE DEBIT

109

CREDIT 1

2 9 0 0 0 00 2 0 0 0 00 2 0 0 0 00

2 3 4

3 3 0 0 0 00

5 6 7

The individual balances in the accounts receivable subsidiary ledger are credited for a total of $33,000.

Chapter 28 Financial Statements and Liquidation of a Partnership

806-825_CH28_868829.indd 812

9/15/05 2:13:46 PM

Sale of Partnership Merchandise at a Loss On April 29 Surfside sold its merchandise inventory, which cost $35,000, for $32,000 to a discounter. The sale resulted in a $3,000 ($32,000
$35,000) loss to the partnership. The partners divided the loss equally. The following entry records the sale of the inventory and the distribution of the loss to the partners: GENERAL JOURNAL DATE 1 2 3 4 5 6

DESCRIPTION

POST. REF.

20-Apr. 29 Cash in Bank Molly Gill, Capital Don Putman, Capital Merchandise Inventory Receipt 363

PAGE DEBIT

110

CREDIT 1

3 2 0 0 0 00 1 5 0 0 00 1 5 0 0 00

2

AS YOU

READ

Compare and Contrast Sale of Merchandise How does the sale of a partnership’s merchandise during regular business operations differ from the sale of merchandise during a liquidation?

3 4

3 5 0 0 0 00

5 6

7

7

Sale of Partnership Equipment at a Gain The partnership owns equipment that cost $48,000 and has accumulated depreciation of $8,000. The book value of the equipment is $40,000 ($48,000
$8,000). On May 5 Surfside sold the equipment to a dealer for $42,000 resulting in a gain of $2,000 ($42,000
$40,000). The gain was divided equally between the partners. The entry to record the sale of the equipment and distribution of the gain is as follows:

GENERAL JOURNAL DATE 1 2 3 4 5 6 7

20-May

DESCRIPTION

POST. REF.

PAGE DEBIT

111

CREDIT 1

5 Accum. Depr.—Equipment Cash in Bank Molly Gill, Capital Don Putman, Capital Equipment Receipt 371

8

8 0 0 0 00 4 2 0 0 0 00

2 3

1 0 0 0 00 1 0 0 0 00 4 8 0 0 0 00

4 5 6 7 8

Payment of Partnership Liabilities On May 11 the partnership mailed Check 234 to pay the bank note and Checks 235 through 238 to pay the accounts payable balances. The entry to record the transactions follows.

Section 2 Liquidation of a Partnership

806-825_CH28_868829.indd 813

813

9/15/05 2:13:51 PM

GENERAL JOURNAL DATE 1 2 3 4 5

DESCRIPTION

POST. REF.

PAGE DEBIT

20-May 11 Notes Payable Accounts Payable Cash in Bank Checks 234–238

112

CREDIT 1

1 0 0 0 0 00 20 0 0 0 00

2 3

3 0 0 0 0 00

4 5

6

6

The individual balances in the accounts payable subsidiary ledger are debited for a total of $20,000. This entry brings the Accounts Payable account to zero. Only three accounts remain in the ledger after all noncash assets have been sold and the debts of the partnership have been paid: Cash in Bank; Molly Gill, Capital; and Don Putman, Capital. Molly Gill, Capital

Cash in Bank Debit Bal. 18,000 29,000 32,000 42,000 Bal. 91,000

Credit 30,000

Debit 2,000 1,500

Credit Bal. 57,000 1,000

Bal. 54,500 Don Putman, Capital Debit 2,000 1,500

Credit Bal. 39,000 1,000

Bal. 36,500

Now cash can be distributed to the partners based on the final balances in their capital accounts: Gill, $54,500 and Putman, $36,500.

Final Distribution of Cash On May 15 the partnership is ended by distributing the balance of Cash in Bank to Gill and Putman. The final transaction to end the partnership is recorded as follows:  ,
Ê"1,
 $!4%       

814

$%3#2)04)/.

Ó䇇 >ÞÊ £x œÞʈ]Ê >«ˆÌ> Ê œ˜Ê*Õ̓>˜]Ê >«ˆÌ> Ê >Åʈ˜Ê >˜Ž Ê Ê …iVŽÃÊÓΙÊ>˜`ÊÓ{äÊ̜ Ê Ê ˆµÕˆ`>ÌiÊ̅iÊ«>À̘iÀň« Ê

0/34 2%&

0!'% $%")4

££Î

#2%$)4 

x { x ä ä ää Î È x ä ä ää

 

™ £ ä ä ä ää

   

Chapter 28 Financial Statements and Liquidation of a Partnership

806-825_CH28_868829.indd 814

4/6/06 6:39:52 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Use a diagram like this one to describe the actions needed to liquidate a partnership. Add answer boxes as needed.

,IQUIDATINGA0ARTNERSHIP

Do the Math Max & Tex novelty store, a partnership, is ending. You are to help liquidate the partnership. Listed below are the remaining assets and liabilities of the business. Max & Tex share profits and losses equally. Assets Cash in Bank Accounts Receivable Merchandise Inventory Equipment

$20,000 $12,000 $42,000 $60,000

Liabilities Accounts Payable $15,500 Partners’ Equity Marilyn Max, Capital $59,250 Tom Tex, Capital $59,250

Liquidation Transactions: 1. Customers will pay their accounts in full before the liquidation date. 2. Merchandise inventory was sold for $40,000 resulting in a $2,000 loss to the partnership. 3. Equipment was sold to a local retailer for $70,000 resulting in a gain of $10,000. 4. Accounts payable will be paid in full.

Instructions How much cash will each partner receive at final liquidation?

Problem 28–3 Recording a Loss and a Gain on the Sale of Noncash Assets by a Partnership Partners Gunther and Pertee share profits equally. In the process of ending the business, they sell all of the partnership’s noncash assets. The transactions for the sales follow.

Instructions Record the transactions in general journal form in your working papers. Use general journal page 275. Date

Transactions

Sept. 4 The merchandise inventory, which cost $45,000, was sold for $38,000. 15 The office equipment, with a book value of $27,000, was sold for $29,000.

Section 2 Liquidation of a Partnership

806-825_CH28_868829.indd 815

815

9/15/05 2:14:50 PM

Summary

CH A P T ER 2 8 Key Concepts

1. The income statement of a partnership may have a special section showing the division of profits or losses among partners. ABC Partnership Income Statement For the Year Ended July 31, 20--

Net Income Division of Net Income: Partner A Partner B Partner C Net Income

56 0 0 0 00 14 0 0 0 00 14 0 0 0 00 28 0 0 0 00 56 0 0 0 00

2. A partnership prepares a statement of changes in partners’ equity. This statement reflects beginning balances, investments, and withdrawals by each partner. ABC Partnership Statement of Changes in Partners’ Equity For the Year Ended July 31, 20-B

A Beginning Capital, Aug 1, 20-Add: Investments Net Income Subtotal Less: Withdrawals Ending Capital, July 31, 20--

7 14 21 8 13

500 000 500 000 500

00 00 00 00 00

7 14 21 12 9

500 000 500 500 000

C 00 00 00 00 00

15 28 43 18 25

000 000 000 000 000

Totals 00 00 00 00 00

30 0 56 0 86 0 38 5 47 5

0 0 0 0 0

0 0 0 0 0

00 00 00 00 00

3. The balance sheet of a partnership contains a capital section titled Partners’ Equity: ABC Partnership Balance Sheet July 31, 20--

Partners’ Equity Partner A, Capital Partner B, Capital Partner C, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

13 5 0 0 00 9 0 0 0 00 25 0 0 0 00 47 5 0 0 00 60 5 0 0 00

4. Dissolution refers to the legal termination of a partnership due to a change in partners. Business operations continue, and a new partnership is formed. Liquidation refers to the legal termination of a partnership due to the termination of its business operations. It is the process of settling the partnership’s business affairs when it ends.

816

Chapter 28 Summary

806-825_CH28_868829.indd 816

9/15/05 2:14:55 PM

Summary

C HAPT E R 28

Liquidation involves the following four steps: a. Sell all noncash partnership assets for cash. b. Add all gains from the sale of the assets to the capital accounts based on the partnership agreement. If the asset sales result in a loss, deduct the amount from the capital accounts based on the partnership agreement. c. Pay all partnership liabilities. d. Distribute any remaining cash to the partners based on the final balance in the partners’ capital accounts. For example, the sale of accounts receivable at a loss is recorded as follows, with the loss divided and debited to each partner according to the partnership agreement: Debit Cash in Bank. Debit the capital account of each partner. Credit Accounts Receivable. Sale of merchandise at a loss is recorded as follows: Debit Cash in Bank. Debit the capital account of each partner. Credit Merchandise Inventory. When plant equipment is sold, its book value is zeroed out by crediting the asset and debiting the related Accumulated Depreciation account. If the equipment is sold at a loss, the loss is divided and debited to each partner according to the partnership agreement: Debit Accumulated Depreciation—Equipment. Debit Cash in Bank. Debit the capital account of each partner. Credit Equipment. 5. If sale of an asset results in a gain, the gain is divided and credited to each partner according to the partnership agreement: Debit Cash in Bank. Credit the capital account of each partner. Credit the asset. 6. After all noncash assets have been sold and the partnership liabilities have been paid, the only accounts that remain in the ledger are: • Cash in Bank • the capital account for each partner The final transaction to liquidate a partnership is to distribute the cash to the partners based on the ending balances in their capital accounts: Debit the capital account of each partner. Credit Cash in Bank.

Key Terms dissolution

(p. 811)

liquidation

(p. 811)

statement of changes in partners’ equity

(p. 809)

Chapter 28 Summary

806-825_CH28_868829.indd 817

817

9/15/05 2:15:02 PM

C H A P T ER 2 8 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Partnership Income Statement a. What does a partnership income statement report? b. How may the income statement for a partnership differ from that of a sole proprietorship? Statement of Changes in Partners’ Equity a. Explain what a statement of partners’ equity shows. b. How does a statement of changes in partners’ equity differ from a statement of changes in owner’s equity? Partnership Balance Sheet a. What does a partnership balance sheet report? b. How does the balance sheet for a partnership differ from that of a sole proprietorship and a corporation? Liquidation Losses a. When selling partnership accounts receivable at a loss, what accounts are affected? b. What happens to the partners’ capital accounts when noncash assets are sold at a loss? Liquidation Gains a. What happens to the partners’ capital accounts when noncash assets are sold at a gain? b. What basis is used to distribute gains and losses from the sale of noncash assets? Final Liquidation Entry a. Which accounts remain on the ledger after all noncash assets have been sold and the partnership liabilities have been paid? b. When liquidating a partnership, what is the final transaction?

Apply Key Terms Imagine that you have been asked to explain the following terms and how they might relate to a timber company organized as a partnership. dissolution liquidation statement of changes in partners’ equity

818

Chapter 28 Review and Activities

806-825_CH28_868829.indd 818

9/15/05 2:15:05 PM

Computerized Accounting C HAPT E R 28 Setting Up the General Ledger Making the Transition from a Manual to a Computerized System Task Setting up general ledger accounts with balances

Manual Methods • Using accounting stationery, open general ledger accounts based on the expected transactions of the business. • Record the balance of each account. Ideally, end-of-period balances should be used. This ensures that the accounting records were in balance when they were transferred.

Computerized Methods • Create a chart of accounts, selecting from predefined charts offered, or by entering select accounts based on the expected transactions for the business. • Enter the beginning balance for each account.

Q&A Peachtree Question

Answer

How do I convert a manual accounting general ledger system into Peachtree?

1. Create a general ledger account in Peachtree for each account in the manual system. From the Maintain menu, select Chart of Accounts. 2. Enter the account number, name, and account type for all accounts. 3. Click the arrow for Beginning Balances. 4. Select the period from which the balance was taken. 5. Enter the beginning balance for each account. 6. Click OK when all balances have been entered and the Trial Balance Difference at the bottom of the screen is 0.00. 7. Click Save.

QuickBooks Q & A QuickBooks Question How do I convert a manual accounting general ledger system into QuickBooks?

Answer 1. Create a general ledger account in QuickBooks for each account in the manual system. From the Lists menu, select Chart of Accounts. 2. Click the Account drop-down list, and select New. 3. Enter the account type, number, name, and description. 4. Enter the beginning balance in the Opening Balance field and the date. 5. Click Next to enter additional accounts. 6. Click OK when you have finished.

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers. Chapter 28 Computerized Accounting

806-825_CH28_868829.indd 819

819

9/15/05 2:15:44 PM

Problems

C H A P T ER 2 8 Complete problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 28–4 1. Select the spreadsheet template for Problem 28–4. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

SMART GUIDE Step–by–Step Instructions: Problem 28–5 1. Select the problem set Problem 28–5. 2. Rename the company and set the system date. 3. Record the transactions to liquidate the partnership using the General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Complete the Analyze activity. 6. End the session.

Manual Glencoe Peachtree Complete QuickBooks Spreadsheet Spreadshee OR OR OR Accounting Software Templates Working Papers Templates

Problem 28–4 Preparing an Income Statement and Balance Sheet for a Partnership Joy Webster and Diana Ruiz have been in business since the beginning of the year. Now at the end of the year, they would like to know how the partnership has done in its first year of operation. Joy and Diana stated in the partnership agreement that they will share profits equally. The net income for the year was $5,780. The January 1 capital balances for both partners were $0. Joy invested $6,000 cash in the partnership throughout the year and withdrew $1,800. Diana invested $5,500 cash in the partnership and withdrew $1,200.

Instructions In your working papers, prepare the Division of Net Income section of the income statement and the Partners’ Equity section of the balance sheet for the partnership.

Analyze

Identify the ending balances in the partners’ capital accounts.

Problem 28–5 Liquidating the Partnership with Losses on the Sale of Noncash Assets Guice and Ward decide to end their partnership on September 21. They share profits and losses equally. The account balances of the partnership as of that date follow. Cash Inventory Equipment (book value) Accounts Payable Guice, Capital Ward, Capital

$6,500 8,800 2,700 4,000 6,800 7,200

The partnership sold the inventory for $5,000 and the equipment for $2,000. All of the accounts payable will be paid in full with the cash.

Instructions In your working papers, prepare the journal entries to record the liquidation of this partnership. Use general journal page 85.

Analyze

820

Conclude whether the partners’ capital accounts increased or decreased as a result of the liquidation (before the final distribution). Explain why.

Chapter 28 Problems

806-825_CH28_868829.indd 820

9/15/05 2:15:47 PM

Problems

C HAPT E R 28

Problem 28–6 Recording a Gain or a Loss on the Sale of Noncash Assets by a Partnership

SMART GUIDE Step–by–Step Instructions: Problem 28–6

Hudson and Franklin are in the process of liquidating their partnership. They share profits and losses in a 3:1 ratio. They have sold all of the partnership’s noncash assets. The transactions for the sales follow. Date

Transactions

May 29 The equipment, with a book value of $14,500, was sold for $12,775. June 2 The $7,800 in accounts receivable was sold to a finance broker for $6,900. 4 The merchandise inventory, which cost $2,800, was sold for $1,900.

Instructions In your working papers, record the journal entries for the sale of noncash assets. Use general journal page 120.

Analyze

1. Select the problem set Problem 28–6. 2. Rename the company and set the system date. 3. Record the transactions to liquidate the partnership using the General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Complete the Analyze activity. 6. End the session.

QuickBooks PROBLEM GUIDE

Explain why losses are distributed to the partners’ capital accounts before any cash is paid out to the partners.

Step–by–Step Instructions: Problem 28–6

Problem 28–7 Preparing a Statement of Changes in Partners’ Equity On January 1 Carol Farmer and Jim Romans formed a partnership, Research Consultants. Each partner invested $50,000 in cash on that date. The partnership agreement stated that the partners would share net income or loss equally. During the year Farmer invested an additional $2,000 and withdrew $7,500 for personal use. Romans invested an additional $1,500 and withdrew $8,500. Net income for the first year was $33,176.

1. Restore the Problem 28-6.QBB file. 2. Record the transactions to liquidate the partnership using the Make General Journal Entries option. 3. Print a Journal report and proof your work. 4. Complete the Analyze activity. 5. Back up your work.

Instructions In your working papers, prepare a statement of changes in partners’ equity for the year ended December 31.

Analyze

Identify the amount of partners’ equity for Carol Farmer that will appear on the December 31 balance sheet.

Chapter 28 Problems

806-825_CH28_868829.indd 821

821

9/15/05 2:15:51 PM

Problems

C H A P T ER 2 8

Problem 28–8 Liquidating the Partnership SMART GUIDE Step–by–Step Instructions: Problem 28–8 1. Select the problem set Problem 28–8. 2. Rename the company and set the system date. 3. Record the transactions to liquidate the partnership. 4. Print a General Journal report. Proof your work. 5. Complete the Analyze activity. 6. End the session.

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: Problem 28–8 1. Restore the Problem 28-8.QBB file. 2. Record the transactions to liquidate the partnership. 3. Print a Journal report and proof your work. 4. Complete the Analyze activity. 5. Back up your work.

SPREADSHEET SMART GUIDE

On October 15 Martinez and Royka decide to end their partnership. Their assets consist of $10,000 in cash and inventory that cost $105,000 and was sold for $95,000. Their only liability is a note payable for $10,000 that will be paid in full. Their capital balances are Martinez, $60,000 and Royka, $45,000. They share profits and losses equally.

Instructions In your working papers, prepare the journal entries to record the liquidation of the partnership.

Analyze

CHALLENGE PROBLEM

Calculate how much cash each partner would receive at the liquidation if the inventory was sold for $80,000.

Problem 28–9 Completing End-ofPeriod Activities for a Partnership

Richard Smooth and Carrie Overhill are partners in the firm of R&C Roofing. They agreed to divide net income or loss on the following basis: Smooth, ¾; Overhill, ¼. The completed work sheet for R&C Roofing for the year ended December 31 appears in your working papers.

Instructions In your working papers: 1. 2. 3. 4.

Prepare an income statement for the partnership. Prepare a statement of changes in partners’ equity. Prepare a balance sheet. Journalize the adjusting and closing entries, beginning on page 27 of the general journal.

Analyze

Calculate the total year-end partners’ equity if neither Smooth nor Overhill had withdrawn any cash from the business.

Step–by–Step Instructions: Problem 28–9 1. Select the template for Problem 28–9. 2. Enter your name and the date in the spaces provided. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the program.

822

Chapter 28 Problems

806-825_CH28_868829.indd 822

9/15/05 2:15:52 PM

Winning Competitive Events

CHAPTER 28

Practice your test-taking skills! The questions on this page are reprinted with permission from national organizations: • Future Business Leaders of America • Business Professionals of America Use a separate sheet of paper to record your answers.

Future Business Leaders of America MULTIPLE CHOICE 1. When there is a net loss, the a. Capital account is increased by the amount of the net loss. b. Drawing (Withdrawals) account is increased by the amount of the net loss. c. Capital account is decreased by the amount of the net loss. d. Drawing (Withdrawals) account is decreased by the amount of the net loss. 2. A partnership may be terminated by the a. partners’ mutual agreement. b. death of a partner. c. admission of a new partner. d. all of the above. e. none of these answers 3. A partnership’s capital accounts are changed if a. net income or net loss is recorded. b. partners invest additional cash in the business. c. partners withdraw cash from the business. d. all of the above. e. none of these answers 4. When both a partnership and the partnership business end, this is called a a. mutual understanding. b. dissolution. c. termination. d. liquidation.

Business Professionals of America MULTIPLE CHOICE 5. The ________ shows the picture of a firm’s financial position at a point in time. a. income statement b. balance sheet c. distribution of net income d. none of the above

Need More Help? Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Winning Competitive Events and select Chapter 28. • Practice Questions and Test-Taking Tips • Concept Capsules and Terminology

glencoeaccounting.glencoe.com

806-825_CH28_868829.indd 823

Chapter 28 Winning Competitive Events

823

10/13/05 11:53:43 PM

C H A P T ER 2 8 Critical Thinking

Partnerships

CASE

STUDY

Partnership: Building and Design

ETHICS

Using Another Person’s Idea

a mattoefr

))

$ )) Communicating ACCOUNTING

824

Real-World Applications and Connections

1. What happens when a partnership dissolves? 2. How is dissolution different from liquidation? 3. For each of the following transactions, state whether partners’ capital is debited or credited. a. Sold an asset at a loss. b. Sold an asset at a gain. c. Sold an asset at book value. 4. Why does the final partnership liquidation entry involve just one asset account? 5. After selling all partnership assets and paying all creditors, the capital account balance of partner A is a $10,000 credit and of partner B is a $2,000 debit. What is the Cash in Bank balance? What entries would close the books? 6. Defend the requirement that creditors must be paid before partners can distribute remaining cash in a liquidation process. Barnes Construction is a homebuilder that wants to expand into commercial real estate. It has a client who owns 10 acres of land on which she wants to build an apartment complex. Barnes is looking for a partner to help design and build it. Slater Architectural Design is looking for new projects. Barnes and Slater form a partnership to design and build the complex for $10,400,000. Based on estimated costs, the project should earn net profits of 18 percent. INSTRUCTIONS 1. If Barnes and Slater agree to share revenue and expenses equally, how much profit will each partner earn? 2. To limit each partner’s liability to this project only, list the information that should be in the partnership agreement. You are an accounting clerk for two dentists who are partners. The partners recently began a program to give a bonus to employees for making suggestions that are implemented and result in cost savings. You submitted a suggestion for which you received a $1,000 bonus. A co-worker had originally mentioned the idea. ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Presenting Your Case Maurice Lance and Terry Klaus are partners in M&T Computer Solutions. Maurice wants to contribute more money to the partnership, but Terry is satisfied with his initial investment. Choose a classmate for a role-play situation involving partners. Discuss the pros and cons of making additional investments.

Chapter 28 Real-World Applications and Connections

806-825_CH28_868829.indd 824

9/15/05 2:15:57 PM

Real-World Applications and Connections Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

Decision to Liquidate You and a partner operate a small sports center. A large national sports complex recently opened in a nearby mall, causing your business to drop sharply. You have decided to close the center and liquidate the assets. INSTRUCTIONS List all of the pros and cons of liquidating a business. List and prioritize the tasks necessary to complete the liquidation.

Organization of Petroleum Exporting Countries (OPEC) OPEC is an alliance of 11 oil producing nations. It seeks to stabilize oil prices and help producers achieve a reasonable rate of return. OPEC members discuss oil production levels, pricing, demand, and environmental issues. OPEC can increase its oil production in order to prevent price increases or reduce oil production to hedge against falling prices. INSTRUCTIONS List the ways in which OPEC impacts the oil market.

Your Understanding of Accounting You have been studying accounting for almost a year and have some ideas about what it takes to be an accountant. In the last two decades, computer technology has changed the profession from one providing number-crunching services to one that provides knowledge-based services. PERSONAL FINANCE ACTIVITY Based on what you know about accounting, make a list of the qualities and skills a person would need to be a successful accountant. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 28.

Evaluating Partnership Operating Results You learned earlier how to use ratio analysis to evaluate the financial health of a business. Partnerships are also interested in these measures of financial health. Return on sales is a measure of how much profit the business is earning for each dollar of total revenue. The current ratio and quick ratio show a company’s ability to repay its debts. INSTRUCTIONS Review the ratios on pages 235– 236, then use the balance sheet on page 812 for the following tasks. Liquidation 1. Calculate the return on sales for Surfside A liquidation is a busy Bike & Skate Rentals, assuming a revenue of time for accountants. Visit $192,000 and net income of $24,000 for the glencoeaccounting fiscal period just ended. .glencoe.com and click 2. Analyze Surfside’s liquidity based on the on Student Center. Click on WebQuest and select Unit 6 to current ratio and the quick ratio. continue your Internet project. 3. Write one to two paragraphs describing Surfside’s financial health based on your analysis of its financial information.

glencoeaccounting.glencoe.com

806-825_CH28_868829.indd 825

CHAPT E R 28

Chapter 28 Real-World Applications and Connections

825

9/15/05 2:16:04 PM

MINI PRACTICE SET 6

Completing the Accounting Cycle for a Partnership Fine

Main Task ▲

Complete the accounting cycle for Fine Finishes for its first month of business.

Summary of Steps ▲

Set up new general ledger accounts.

▲

Analyze the transactions.

▲

Journalize and post the transactions.

▲

Prepare a trial balance and a work sheet.

▲

Prepare the financial statements.

▲

Journalize and post the closing entries.

▲

Prepare a post-closing trial balance.

Fine Finishes

Finishes

Company Background: Fine Finishes is an interior and exterior painting company organized as a partnership. The partners are Laura Andersen, Sean Woo, and David Ingram. The business earns revenue from consultation and painting fees. The partnership divides income and losses as follows: Laura and Sean each receive 33 percent, and David receives 34 percent.

Why It’s Important ▲

You might work for a partnership someday. Maybe you will even open your own business with some partners. While you create the best product or service, you also need to know what is happening with your company’s finances.

826

Mini Practice Set 6

826-829_MPS06_868829.indd 826

9/15/05 2:26:14 PM

Fine Finishes (continued) Complete problems using:

Manual Glencoe Peachtree Complete QuickBooks OR OR Accounting Software Working Papers Templates

Your Job Responsibilities: As the accountant for Fine Finishes, use the accounting stationery in your working papers to complete the following activities. (1) Open a general ledger account for each account in the chart of accounts. (2) Analyze each business transaction. (3) Enter each business transaction in the general journal. Begin on journal page 1. (4) Post each journal entry to the appropriate accounts in the general ledger. (5) Prepare a trial balance and then complete the work sheet. (6) Prepare an income statement. (7) Prepare a statement of partners’ equity. (8) Prepare a balance sheet. (9) Journalize and post the closing entries. (10) Prepare a post-closing trial balance.

CHART OF ACCOUNTS Fine Finishes ASSETS

PARTNERS’ EQUITY

101 Cash in Bank 105 Accts. Rec.—Mountain View City School District 120 Computer Equipment 130 Office Supplies 135 Office Equipment 140 Painting Supplies 145 Painting Equipment

301 302 303 304 305 306 310

LIABILITIES 205 Accts. Pay.—Custom Color 210 Accts. Pay.—J & J Hardware and Lumber 215 Accts. Pay.—Paint Palace

Business

Laura Andersen, Capital Laura Andersen, Withdrawals David Ingram, Capital David Ingram, Withdrawals Sean Woo, Capital Sean Woo, Withdrawals Income Summary

REVENUE 401 Painting Fees 405 Consultation Fees EXPENSES 505 510 515 520

Advertising Expense Miscellaneous Expense Rent Expense Utilities Expense

Transactions: Fine Finishes began business operations

on February 1 of this year. During the month of February, the business completed the transactions that follow.

Mini Practice Set 6

826-829_MPS06_868829.indd 827

827

9/15/05 2:27:28 PM

MINI PRACTICE SET 6 (CONTINUED)

Completing the Accounting Cycle for a Partnership Date

SMART GUIDE

Feb.

Transactions 1

Step–by–Step Instructions: 1. Select the problem set for Fine Finishes (MP–6). 2. Rename the company and set the system date. 3. Record all of the business transactions using the General Journal Entry option. 4. Print a General Journal report and proof your work. 5. Print a General Ledger report. 6. Print a General Ledger Trial Balance. 7. Print an Income statement and a Balance Sheet. 8. Click the Save Pre-Closing Balances button in the Glencoe Smart Guide window. 9. Record the closing entries using the General Journal Entry option. 10. Print a general journal report and proof your work. 11. Print a Post-Closing Trial Balance. 12. Complete the Analyze activity and the Audit Test. 13. End the session.

TIP: Peachtree can only close a fiscal year. To close a monthly fiscal period, enter the closing entries using the General Journal Entry option.

828

Laura Andersen, David Ingram, and Sean Woo agreed to form a partnership and invest the following assets, Memorandum 1:

Contributed Assets Cash

Andersen

Ingram

Woo

$1,500

$1,000

$1,200

Computer Equipment

2,800

Office Equipment

100

Painting Supplies

150

225

Painting Equipment

1,375

1,675

Total assets invested

$3,125

$3,800

$3,100

1

Signed a one-year rental agreement for a warehouse and small office at $1500 per month. The first month’s rent was paid, Check 1101.

1

Put an ad in the Call an Expert circular for $25, Check 1102.

1

Paid $100 to the utility company to start electric service, Check 1103.

1

Paid telephone company $175 to begin phone service and run dedicated line for computer, Check 1104.

2

Awarded a contract to paint a kitchen and family room for the McGuires. Collected $250 deposit, Receipt 1.

2

Bought paint and border stencils from Custom Color for $200 on account, Invoice 742.

2

Issued check 1105 for $55 for a business license to operate in the city of Mountain View, Alabama (Miscellaneous Expense).

4

Purchased $115 in office supplies, Check 1106.

5

Finished painting the kitchen and family room for the McGuires. Collected final payment of $450, Receipt 2.

6

Joined Mountain View Chamber of Commerce by purchasing membership of $45 (Miscellaneous Expense), Check 1107.

8

Bought painting equipment on account for $375 from Paint Palace, Invoice 1162.

10

Received $60 for color and painting consultation, Receipt 3.

CONTINUE

Mini Practice Set 6

826-829_MPS06_868829.indd 828

9/15/05 2:27:29 PM

Fine Finishes (continued)

Date

Transactions (cont.)

12

Finished painting the cafeteria at the elementary school. Issued Invoice 101 to Mountain View City School District for $835.

14

Sent Check 1108 for $200 to Custom Color on account.

15

Andersen, Ingram, and Woo each made a withdrawal of $650 for personal use, Checks 1109, 1110, and 1111, respectively.

15

Awarded a contract to paint exterior of the Wicker and Hartel law office building. Received deposit of $1,000, Receipt 4.

16

Spent $135 for new paint brushes (Painting Supplies), Check 1112.

16

Bought paint from Custom Color for $395 on account, Invoice 750.

17

Received and paid Invoice 303 from Mountain View Realtors for ad in real estate brochure for $77, Check 1113.

18

Received $125 for painting consultation, Receipt 5.

19

Wrote Check 1114 for $85 to repair computer printer (Miscellaneous Expense).

21

Paid Paint Palace $375 on account, Check 1115.

22

Finished painting the Wicker and Hartel law office building. Collected final payment of $2,000, Receipt 6.

24

Bought $90 of lumber (Painting Supplies) on account from J & J Hardware and Lumber, Invoice 207.

25

Received $575 for painting and making minor repairs to a garage, Receipt 7.

28

Andersen, Ingram, and Woo each made a withdrawal of $650 for personal use, Checks 1116, 1117, and 1118, respectively.

Analyze

QuickBooks PROBLEM GUIDE Step–by–Step Instructions: 1. Restore the Mini Practice 6.QBB file. 2. Enter all of the business transactions using the Make General Journal Entries option in the Company menu. 3. Print a Journal report, a General Ledger report, a Trial Balance, an Income Statement, and a Balance Sheet. 4. Enter the closing entries using the Make General Journal Entries option in the Company menu. 5. Print a Journal report displaying only the closing entries. 6. Print a Post-Closing Trial Balance. 7. Proof your work and make any needed corrections. 8. Complete the Analyze activity and the Audit Test. 9. Back up your work.

For each partner, calculate the rate of return on equity for February, the first month of operations. Use the Partners’ original investments of equity in the formula: Return on Equity = Net Income  Equity. How does each partner’s return compare to the overall return for the partnership?

Mini Practice Set 6

826-829_MPS06_868829.indd 829

829

4/6/06 6:41:18 PM

CH A P T ER 2 9

Ethics in Accounting BEFORE YOU

READ

What You’ll Learn

Predict

1.

Explain the meaning of ethics.

2.

Describe the components of business ethics.

3.

Identify the role of the accountant in business ethics.

1. 2. 3. 4.

4.

Discuss how ethical behavior benefits individuals, businesses, and society.

5.

Explain the key principles an accountant is expected to follow.

6.

7. 8.

What does the chapter title tell you? What do you already know about this subject from personal experience? What have you learned about this in the earlier chapters? What gaps exist in your knowledge of this subject?

Exploring the Real World of Business ASSURING RESPONSIBLE GOVERNANCE

The Institute of Internal Auditors The success or failure of business depends on ethical

Identify the accounting organizations that establish codes of ethics for the profession.

corporate governance and accounting practices. The term

Describe the Sarbanes-Oxley Act.

believes that the internal auditor must play a strong and visible

Define the accounting terms introduced in this chapter.

Internal auditors work independently within a business to

governance refers to the exercise of authority, administration, and decision making for an organization. The Institute of Internal Auditors, an international professional organization, role in governance. review and improve the company’s operations and internal

▲

Why It’s Important

control processes. They use strict standards to make sure

The business community and the public place their trust in the accounting profession.

government, and customers. In addition, the internal auditor

that the business sticks to its agreements with suppliers, designs plans to protect assets and to make the best use of the company’s resources.

What Do You Think? Internal auditors evaluate procedures used to safeguard the resources of a business. What are some of these resources?

830

Chapter 29 Ethics in Accounting

830-846_CH29_868829.indd 830

4/6/06 6:43:03 PM

Working in the Real World APPLYING YOUR ACCOUNTING KNOWLEDGE Do you, or anyone you know, work for a fastfood restaurant? Whether selling burgers, tacos, or salads, these restaurants must ensure that the food they sell is safe for consumption. They must also provide a safe and sanitary place for their customers to eat. Companies establish controls to ensure that their quality standards are met. In this chapter we will look at ethical standards that accountants are expected to follow.

glencoeaccounting.glencoe.com

830-846_CH29_868829.indd 831

Personal Connection 1. What risks do you think a fast-food restaurant faces in regard to customer health? 2. What kinds of controls would you suggest to guard against these risks?

Online Connection Go to glencoeaccounting.glencoe.com and click on Student Center. Click on Working in the Real World and select Chapter 29.

831

9/15/05 2:29:11 PM

SECTION 1

BEFORE YOU

READ

Main Idea

All elements of society benefit from ethical behavior.

Read to Learn…

➤ what is meant by the term

ethics. (p. 832) ➤ who benefits from ethical behavior. (p. 834)

Key Terms ethics business ethics code of ethics ethics officer

AS YOU

READ

Key Point Modeling Behavior Employees learn ethical standards of an organization by watching the behaviors of their employers and managers.

832

The Nature of Ethics Have you ever had to make a difficult decision about a particular course of action or behavior? Did you consider how you would feel about the action or how others would view your choice? Did you consider how your behavior would affect others? If so, you have probably encountered an ethical dilemma.

Ethics What Is Meant by Ethics? Ethics is the study of our notions of right and wrong. In its broadest sense, ethics deals with human conduct in relation to what is morally good and bad. The term ethics often refers to a set of basic principles. Life is complex and individuals must face a variety of situations. A person’s ethics, or basic principles, can provide guidelines for action when facing ethical dilemmas. The basic values found in a system of personal ethics exist in systems of business ethics as well. Business ethics are not very different from ethics in general.

How Are Business Ethics Determined? Business ethics refers to the policies and practices that reflect a company’s core values such as honesty, trust, respect, and fairness. The ethics of a business can be seen by the way it treats employees and customers and how it attends to shareholder value, community service, supplier relationships, and regulatory law. Review the following components to understand how a business ethics program can be established. The Law As a Guide. A discussion of ethical performance should consider the relationship between law and ethics. While law and ethics both define proper and improper behavior, law attempts to formally define the general public’s ideas about what makes something right or wrong. The law describes a minimum acceptable level of correct behavior. In contrast, ethical concepts have more subtle implications and are more complex than written rules of law. For example, although a business may be well within the law to advertise certain products to teenagers, it may not be the “right” or “ethical” thing to do. A business may use law as a guide, but it must consider ethical principles and standards as well. Statements of Company Values. If you have heard the phrase, “actions speak louder than words,” then you already know one of the best methods of maintaining a strong business ethics program. A person learns standards and values by observing what others do, not by what they say.

Chapter 29 Ethics in Accounting

830-846_CH29_868829.indd 832

9/15/05 2:31:42 PM

In addition to having management and employees set good examples of ethical behavior, a business must state a well-defined framework of ethical concerns and core values. A code of ethics is a formal policy of rules and guidelines that describes the standards of conduct that a company expects from all its employees. The following topics are often addressed within a code of ethics: • • • • • • •

Conflicts of interest Product quality and testing Customer relations Employee relations Suppliers and consultants Expense reports Security

• • • • • •

Political contributions Environmental actions International business Workplace safety Technology Whistle-blowing

AS YOU

READ

Compare and Contrast The Law and Ethics How are laws and ethical concepts similar? How do they differ?

Training and Outreach. After a code of ethics has been created, it is important to communicate that policy properly. Distribution of the written code, along with formal training, helps employees understand the importance of these policies and gives them realistic and concrete examples of what to do when they face an ethical dilemma. Ethics Committees. Ethics committees and ethics officers play an important role in developing and enforcing ethical processes. An ethics officer is the employee directly responsible for creating business conduct programs, evaluating performance, and enforcing standards of conduct. As ethical dilemmas surface, these officials help settle disputed issues and resolve problems. Once a hearing has been held and all issues have been resolved, an enforcement phase may follow. Enforcement. Effective enforcement is necessary to achieve an ethical work environment. A company’s code of ethics might contain penalties for violations that include performance appraisal notes, probation, suspension, demotion, and termination.

What Is the Accountant’s Role? Accountants play a major role in the operation, management, and development of business. In this role, they can face many ethical dilemmas. For example, if an accountant’s manager gives instructions to record the physical inventory at its original costs when it is obvious that the inventory’s value has decreased, what should the accountant do? If an auditor finds questionable accounting practices within a client’s financial reporting, but knows the client is a major source of revenue for his or her firm, what action should he or she take? As you can see, the actions and behaviors of accountants play a critical role in the maintenance of public trust in the business community. The accountant’s opinions, practices, and behaviors directly impact how the company is viewed and how the profession, in turn, is assessed.

AS YOU

READ

In Your Own Words Business Ethics Explain the meaning of business ethics in your own words.

Section 1 The Nature of Ethics

830-846_CH29_868829.indd 833

833

9/15/05 2:31:49 PM

AS YOU

READ

Key Point Positive Returns Practicing good ethics is good for business. Positive returns include employee loyalty, improved sales and company reputation, strengthened financial performance, and a decrease in consumer complaints.

In general, the accountant should focus on the following goals: • • • •

Avoid harm to stockholders. Optimize the interests of the public. Adhere to universal standards of what is right. Respect the human rights of all people.

Specific responsibilities of the accounting profession are expressed in the various codes of ethics created by major organizations. These codes of ethics are addressed in Section 2 of this chapter.

Ethical Behavior What Are the Benefits of Acting Ethically? While it may seem obvious that ethical behavior naturally benefits individuals, business, and society, the following discussion addresses specific benefits to each group.

Individuals Acting ethically produces benefits that can affect the course of your life and the lives of others. These benefits include increased self-esteem, contentment, and self-respect. Ethical behavior also paves the way for achieving life goals. Your honesty, trustworthiness, and integrity will allow you to find a satisfying career with the type of organization that shares your core values. As you act ethically, you will also enjoy the benefit of acceptance in a society that rewards and honors appropriate behavior. As you focus more on the common good rather than selfish interests, you will earn trust and respect from friends, co-workers, employers, and society in general. Finally, ethical behavior will dramatically improve the quality of your decisions.

Businesses Connect to… MATHEMATICS Cost/benefit analysis is a decision model for comparing alternatives. To use it you subtract each alternative’s costs from its financial benefits. Not all costs and benefits can be measured in dollars, though. You should also consider the potential impact each alternative would have on other people.

834

A DePaul University study found that companies that made commitments to an ethics code provided more than twice the value to shareholders than those that did not. A study by Walker Information, a shareholder research firm, supports this finding, reporting that “good corporate behavior” leads to positive business outcomes.

Society Society can be viewed as the sum of all social relationships between humans. Therefore, it is easy to understand why our individual actions contribute to the overall nature of our society. We cannot expect our society to become more ethical unless individuals and businesses commit to ethical behaviors. As businesses act in ethical ways, new wealth for society is created. In the realm of ethical financial reporting, the public can be confident in the data provided and make informed investment decisions. In turn, greater capital funding is available for growth and productivity, yielding strong and healthy economies.

Chapter 29 Ethics in Accounting

830-846_CH29_868829.indd 834

9/15/05 2:32:06 PM

SECTION 1 AFTER YOU

Assessment

READ

Reinforce the Main Idea Identify five components of a business ethics program that were discussed in this section. Use a chart like this one to list two examples of each component.

#OMPONENTOFA"USINESS%THICS0ROGRAM

%XAMPLE

%XAMPLE

Do the Math Assume that you are the chief financial officer for a major manufacturer of infant car seats. The lead product designer has informed management that the installation of a new latch system would improve product safety by 25 percent. The new latch system will add $4 to production costs per car seat. Current production costs are $52.50 per seat, and the product sells for $69.50. Management wants to compare the effect on net income if the product price increases by (a) $1, (b) $2, or (c) $5. 1. If the company sells 8,000 car seats in a year, what is the effect on net income for each proposed price increase scenario? Assume fixed operating costs are $115,000 annually. 2. As an officer of the company, what factors (other than pricing) do you think should be considered when making product design changes?

Problem 29–1 Reporting Ethics Violations Instructions Results from Walker Information’s study on business integrity state that 65 percent of employees who know about an ethical violation choose not to report it. What weaknesses in a company’s ethical environment might be responsible for such a finding? Discuss the components of a strong business ethics plan that management could apply to resolve this situation.

Problem 29–2 Exploring the Difference Between Ethics and Law Instructions Adhering to legal regulations is the first step in behaving ethically. Explain why ethical behavior extends beyond the law. Describe one situation in which a company might act within the boundaries of the law yet still engage in an unethical act. Section 1 The Nature of Ethics

830-846_CH29_868829.indd 835

835

9/15/05 2:32:08 PM

SECTION 2

BEFORE YOU

READ

Main Idea

The accounting profession requires its members to follow a code of ethics.

Read to Learn… ➤ the key principles an

accountant is expected to observe. (p. 836) ➤ the guidelines that accounting organizations provide for decision making. (p. 838) ➤ the impact of the Sarbanes-Oxley Act on the accounting profession. (p. 838)

Key Terms integrity objectivity independence competence confidentiality AS YOU

READ

Key Point Public Trust The practices of the accountant directly reflect the credibility of a business and the trust the public has in the accounting profession.

836

Ethics in the Accounting Profession Professional organizations are often separated from other organizations by a code of conduct or a code of ethics. To build public trust, most accountants voluntarily join a professional organization and accept the standards of conduct expected by the organization. However, ethical behavior requires commitment beyond abiding by a few rules of conduct. No ethics code or written rules can apply to all situations that might arise on the job. Day-to-day job experiences often test an individual’s personal judgment and personal ethics. Written codes of ethics are generally designed to encourage ideal behavior. However, the codes must be both realistic and enforceable. Professional organizations are charged with enforcing the rules of conduct outlined in their codes.

Key Principles What Is the Foundation for Ethics in Accounting? Certain principles provide the framework for rules of conduct that an accountant is expected to follow. These principles include integrity, objectivity, independence, competence, and confidentiality.

Integrity The principle of integrity requires that accountants choose what is right and just over what is wrong. Guidance for behaving with integrity suggests that the accountant ask the following questions: Is this what a person of integrity would do? Have I made a right and just decision? Have I maintained the spirit of ethical conduct? How do you explain the concept of integrity as related to the accounting profession? Making false or misleading entries in a client’s books violates the accounting principle of integrity. Failing to correct false and misleading financial statements also violates integrity. Integrity helps accountants establish the trust necessary for others to rely on their professional judgment.

Objectivity Every year publicly traded corporations must submit financial statements to the Securities and Exchange Commission. Certified public accountants (CPAs) audit these financial statements. CPAs who perform audits are known as independent auditors. They do not work for the companies they audit. For example, suppose that Paul Corporation needs to give audited financial statements to the SEC. Paul

Chapter 29 Ethics in Accounting

830-846_CH29_868829.indd 836

4/6/06 6:43:29 PM

Corporation hires Findlay & Partners, a public accounting firm. Five CPAs who work for Findlay & Partners go to the offices of Paul Corporation and perform the audit. Paul Corporation is the client and Findlay & Partners is the independent auditor. The work of the independent auditor is critical. Many different users of financial information depend on audited financial statements when making decisions. The principle of objectivity requires that accountants be impartial, honest, and free of conflicts of interest. When forming professional judgments, accountants should not be influenced by personal interests or relationships with others or behave in a way that would give even the appearance of improper behavior.

AS YOU

READ

Key Point The Sum of the Parts The behavior of individuals and businesses contributes to the overall ethical performance of society.

Independence CPAs who audit public companies must maintain a position of independence. Independence in this sense means that the CPA does not have a financial interest in or a loan from the company he or she is auditing. An investment in the company or a loan from the company would interfere with the independence required of an auditor. Serving as a director, officer, or employee of the company would also demonstrate a lack of independence. An accountant must act in such a way that maintains the general public’s confidence in the services provided by the profession. Even if the accountant’s financial interest is minor, the relationship could be suspect, and the accountant would be considered to lack independence. Even nonCPA employees in a public accounting firm may not accept more than token gifts from clients.

Competence Competence refers to the knowledge, skills, and experience needed to complete a task. Accountants must perform only those services that they are competent to provide. Accountants are expected to maintain an appropriate level of competence through continuing education and to continually improve the quality of professional services. Services should be rendered promptly, carefully, thoroughly, and in accordance with appropriate technical and ethical standards. Accountants must be committed to learning and professional improvement throughout their professional lives.

Confidentiality Accountants learn about everything from individual salaries to the business strategies of their clients. Confidentiality as related to the accounting profession is the requirement that accountants who acquire information in the course of work protect it and not disclose it without the appropriate legal or professional responsibility to do so. Above all, information should not be used for personal gain. Section 2 Ethics in the Accounting Profession

830-846_CH29_868829.indd 837

837

9/15/05 2:32:20 PM

AS YOU

READ

Key Point Guidelines A code of ethics cannot cover the details of every situation that might occur. Instead, a code provides principles that people can apply to a variety of unexpected situations.

Codes of Ethics What Accounting Organizations Provide Guidelines? Several accounting organizations provide guidelines to assist in ethical decision making.

American Institute of Certified Public Accountants AICPA is the national organization of certified public accountants. The preamble to the AICPA Principles of Professional Conduct states that membership is voluntary and by accepting membership, a CPA assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. The AICPA Code also expresses the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. It calls for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.

Institute of Management Accountants The IMA is the leading professional organization devoted exclusively to management accountants and financial managers. Members of the IMA have a responsibility to maintain professional competence, uphold professional standards of confidentiality, avoid conflicts of interest, and communicate information fairly and objectively.

Institute of Internal Auditors AS YOU

READ

It’s Not What It Seems Code The word code as used in code of ethics is not a symbol with hidden meanings. Codes of ethics are clear statements of principles.

838

The IIA expects its members to demonstrate competence and to follow the principles of integrity, objectivity, and confidentiality. The IIA’s code of ethics is necessary and appropriate because of the public trust placed in internal auditors.

Sarbanes-Oxley Act How Does Federal Legislation Affect Accounting? In recent years, the need for stricter accounting regulations to protect investors arose from several corporate financial scandals. Certain major corporations were accused of misrepresenting their financial position. Public accounting firms that audited them failed to identify and prevent it. Congress decided that the accounting profession and publicly held corporations needed to abide by legal standards of conduct. The most significant changes to corporate governance and accounting practice since the 1930s were implemented when the Sarbanes-Oxley (SOX) Act was signed into law in 2002. SOX requires that CEOs, financial officers, accountants, and auditing firms comply with the new regulations and procedures. It also established an accounting board to oversee and investigate the audits and auditors of public companies.

Chapter 29 Ethics in Accounting

830-846_CH29_868829.indd 838

4/6/06 6:43:38 PM

SECTION 2 AFTER YOU

Assessment

READ

Reinforce the Main Idea Identify five key principles for accountants that were discussed in this section. Use a chart like this one to describe two situations in which the accountant would need to apply each principle.

0RINCIPLE

3ITUATION

3ITUATION

Do the Math Assume that the cost per CPA employee to maintain professional competence is as follows: continuing professional education course, $900; travel, $350; lodging, $135; meals, $75; and lost work time, $480. If the firm has 37 CPA employees, what is the total cost of the commitment to quality work? What is the cost per employee? What is the possible cost of not maintaining professional competence?

Problem 29–3 Promoting Principles of Conduct Instructions Read the following scenario. Identify and discuss behaviors that you believe might violate the key principles of conduct for accountants. In your new position as accounting manager with Triple B Markets, you supervise three staff accountants: Jennifer, Marcus, and Ing. You become aware of the following situations: • • •

Jennifer, a new employee, has never worked as an accountant but scored high marks in her college math classes. Marcus often records payments of utilities as assets instead of expenses because he wants to show a higher net income for the business. You overheard Ing talking with a friend on the phone about the payroll details of the company. Section 2 Ethics in the Accounting Profession

830-846_CH29_868829.indd 839

839

9/15/05 2:33:40 PM

Summary

CH A P T ER 2 9 Key Concepts

1. Ethics is the study of our notions of right and wrong. The word ethics also refers to a set of basic principles. 2. Business ethics are the policies and practices that reflect a company’s core values such as honesty, trust, respect, and fairness. A business ethics program can be established with the following components: • • • • •

adherence to written law statement of company values training and outreach ethics committees enforcement

A business code of ethics often addresses these topics: • • • • • • •

Conflicts of interest Product quality and testing Customer relations Employee relations Suppliers and consultants Expense reports Security

• • • • • •

Political contributions Environmental actions International business Workplace safety Technology Whistle-blowing

3. The behaviors and practices of the accountant are critical to public trust in the business as well as the integrity of the accounting profession. An accountant should focus on the following goals: • • • •

avoiding harm to stockholders optimizing the interests of the public adhering to the universal standards of what is right respecting the human rights of all people

4. Ethical behavior benefits these groups:

840

Individuals

• increases one’s self-esteem, contentment, and self-respect • earns the trust and respect of one’s friends, co-workers, employers, and society

Businesses

• improves business outcomes and shareholder value • increases employee loyalty • enhances company reputation

Society at large

• provides confidence in financial data which leads to informed investor decisions • informed investors provide capital funding for growth and productivity, which yields a strong and healthy economy

Chapter 29 Summary

830-846_CH29_868829.indd 840

9/15/05 2:33:44 PM

Summary

CHAPT E R 29

5. Accountants are expected to follow these key principles: Integrity

Choosing what is right and just over what is wrong

Objectivity

Being impartial, honest, and free from conflicts of interest, including personal interests or relationships that could influence professional judgment

Independence

Having no financial interest in the company being audited

Competence

Possessing the knowledge, skills and experience to perform assigned duties

Confidentiality

Protecting information gained during the course of work, not disclosing that information without the appropriate legal or professional responsibility to do so, and not using that information for personal gain

6. Professional accountants are distinguished by their willingness to accept a high degree of responsibility to the public. Several professional accounting organizations have created guidelines for making ethical decisions. The primary organizations and major ethical principles follow. • American Institute of Certified Public Accountants (AICPA) is a national professional organization of certified public accountants. The preamble to the AICPA Principles of Professional Conduct states that by accepting membership, a CPA assumes an obligation of self-discipline. It also expresses the profession’s recognition of its responsibilities to the public, clients, and colleagues, and calls for an unswerving commitment to honorable behavior. • Institute of Management Accountants (IMA) serves management accountants and financial managers. Its members have the responsibility to maintain professional competence, uphold professional standards of confidentiality, avoid conflicts of interest, and communicate information fairly and objectively. • Institute of Internal Auditors (IIA) is a global professional group specializing in internal auditing. Its members are expected to demonstrate competence and follow the principles of integrity, objectivity, and confidentiality. 7. The Sarbanes-Oxley Act (SOX) was signed into law in 2002 to implement new regulations of corporate governance and accounting practice when some major companies were accused of misrepresenting their financial position.

Key Terms business ethics

(p. 832)

ethics officer

(p. 833)

code of ethics

(p. 833)

independence

(p. 837)

competence

(p. 837)

integrity

(p. 836)

confidentiality

(p. 837)

objectivity

(p. 837)

ethics

(p. 832)

Chapter 29 Summary

830-846_CH29_868829.indd 841

841

4/6/06 6:43:44 PM

C H A P T ER 2 9 AFTER YOU

Review and Activities

READ

Check Your Understanding 1.

2.

3.

4.

5.

6.

Ethics a. What does ethics mean? b. How can personal ethics help an individual face the dilemmas that are part of life’s complexities? Ethics in Business a. How can a company communicate a code of ethics to its employees? b. Name five topics often addressed in a code of ethics. Ethics in Accounting a. List four goals of an ethically trained accountant. b. What role does the accountant play in maintaining public trust in the business community? Benefits of Ethical Behavior a. How does acting ethically benefit an individual? b. How does a business benefit from acting ethically? Key Principles a. Explain the concepts of integrity, objectivity, and independence as related to the accounting profession. b. Explain the concepts of competence and confidentiality as related to the accounting profession. Codes of Ethics a. What is the purpose of a code of ethics for a professional organization? b. Name three professional accounting organizations that have codes of ethics for their members.

Apply Key Terms As the new training director for a public accounting firm, you are to design and present a program to employees on the importance of ethical behavior. A list of terms, which you are to use in your program, follows. Write a complete definition for each term, and write one or two sentences describing the importance of each term to the success of the firm. business ethics code of ethics competence confidentiality ethics

842

ethics officer independence integrity objectivity

Chapter 29 Review and Activities

830-846_CH29_868829.indd 842

9/15/05 2:33:51 PM

Problems

CHAPT E R 29

Problem 29–4 Researching Ethics in the News Instructions Use the library, newspaper, or Internet to find three recent examples of businesses accused of engaging in unethical practices. For each example describe the company’s practices, any legal charges involved, and why you think the business chose this course of action.

Problem 29–5 Creating a Business Ethics Program Instructions As the ethics officer for a national chain of coffeehouses, you must prepare a one- or two-page outline for a business ethics plan that covers the main issues you think are relevant to the company’s operations. Include outline headings for a code of ethics, enforcement measures, and how you will communicate the ethics plan to the company’s employees and managers.

Problem 29–6 Making Ethical Decisions Instructions Sean McGee works as a graphics designer for a large design firm. In his job he utilizes dozens of expensive software programs that the company purchased for its employees to use to complete client projects. Because Sean often takes work home to meet deadlines, he copied all software programs and installed them on his personal home computer. In addition to the work he does for his employer, he takes freelance jobs for extra cash. What are the ethical issues? Who are the affected parties? Do you think Sean has made an ethically correct decision? Why or why not? What would you have done?

Problem 29–7 Making Ethical Decisions Instructions Randy Simpson and Kyung Won worked as recruiters for a national job placement company. The company provided them a database of potential companies that might use a placement service as well as qualified applicants seeking jobs. After working together for several years, Randy and Kyung decided to open their own recruiting agency. When they worked for the national job placement company, both had signed an agreement not to take any company property with them if they left. When Randy and Kyung were setting up their new offices, Kyung noticed Randy downloading files from a CD-ROM to his computer. When questioned, Randy said he had copied his list of clients in addition to names of potential new clients and qualified applicants. Kyung was worried that this act violated the agreement they had signed. Randy maintained that he had built solid relationships with his clients, and that he was entitled to

CONTINUE

Chapter 29 Problems

830-846_CH29_868829.indd 843

843

9/15/05 2:34:04 PM

Problems

C H A P T ER 2 9

take their contact information. As for the names of applicants, he argued, “These people need jobs. If I can help make that happen, I should.” What are the ethical issues? What would you do if you were Kyung?

Problem 29–8 Examining the Impact of Unethical Decisions Instructions Assume that the accountant for a drug manufacturing company made the decision to record the company’s ending drug inventory at an amount higher than its actual worth. How does this decision affect gross profit and net income for that accounting period? In what ways might this decision affect shareholder value? How might this affect confidence in the company’s financial statements in the future?

Problem 29–9 Finding Out What Ethical Principles Mean to Your Classmates Instructions Make a list of the five ethical principles discussed in this chapter. Ask your friends how they think the principles might influence their everyday life. Report your results in class.

Problem 29–10 Finding Out What Ethical Principles Mean to Adults Instructions Ask adults how they think the five principles of ethics influence professional behavior. Share your results in class.

Problem 29–11 Applying a Code of Ethics to Personal Behavior Instructions Write a code of ethics to guide student behavior in school organizations. Interview students outside your class to get ideas.

CHALLENGE PROBLEM

Problem 29–12 Analyzing the Preamble to the Principles Section of the AICPA Code of Professional Conduct

Instructions Review the AICPA Preamble in the text. List two key points covered in each of the two paragraphs. Are the points important to your everyday behavior? Why or why not? 844

Chapter 29 Problems

830-846_CH29_868829.indd 844

4/6/06 6:43:49 PM

Real-World Applications and Connections Critical Thinking

Ethics

CASE

CPA Firm: Audits

a mattoefr

))

STUDY

ETHICS

$ )) Communicating ACCOUNTING

CHAPT E R 29

1. Define business ethics. 2. What is the purpose of a code of ethics? 3. If you were on a committee to establish a student code of ethics for your school, what would you include in it? 4. Compare and contrast ethics and the law. 5. If accountants had no code of conduct, what behavioral guide should be used? 6. The Sarbanes-Oxley Act of 2002 requires that independent auditors report to the client’s audit committee, not to the client’s management. The audit committee is independent of the management. Defend this requirement. Chris Snyder is an audit supervisor for an accounting firm. She and her staff are scheduled to audit Gemma Industries. Gemma’s CEO invites Chris and her staff to arrive one day before the audit for a round of golf and dinner at an exclusive country club. INSTRUCTIONS 1. Determine whether Chris and the audit staff should accept the invitation. 2. If not, explain how Chris could decline the invitation without offending the CEO and possibly losing a client. 3. What ethical issue could arise if Chris accepts the invitation?

Working Conditions You are a stockholder of a corporation that manufactures sports apparel. The company recently moved its operations to a developing country where labor is cheaper. Employees work more than 16 hours per day and the factory conditions are far below those in the United States. While not comparable to U.S. standards, the conditions are better than those found in other local factories, and the rate of pay is nearly double what local workers earned in the past. The company has offered to pay for any work-related injuries. As a stockholder do you agree with this manufacturing strategy? ETHICAL DECISION MAKING 1. What are the ethical issues? 4. How do the alternatives affect the parties? 2. What are the alternatives? 5. What would you do? 3. Who are the affected parties?

Writing E-mail Your friend Samantha recently graduated with a degree in accounting. As a member of the American Institute of Certified Public Accountants, you encourage her to become a CPA and join the organization. Draft an e-mail message to Samantha that includes reasons you think she should join the AICPA and how she will benefit from the membership. Use the Internet or your library to learn more about the AICPA. Chapter 29 Real-World Applications and Connections

830-846_CH29_868829.indd 845

845

9/15/05 2:34:08 PM

C H A P T ER 2 9 Skills Beyond

NUMBERS

INTERNATIONAL

Accounting

Making It

Personal

Analyzing

Financial

Reports

846

Real-World Applications and Connections Working with Diverse Cultures Your ability to work with a variety of ethnic, social, educational, and gender groups indicates your acceptance of cultural diversity. ON THE JOB As the owner of Say it Right, an interpreting service, you hire employees from many cultures. You decide to offer your employees workshops on cultural acceptance techniques. INSTRUCTIONS List 10 items to discuss in these workshops. Include issues that deal with cultural awareness and gender issues in the workplace.

The Decade of Education for Sustainable Development (DESD) Global ethics include concern for the future of humankind, respect for the planet, and recognition of diverse cultures. Such values are being addressed during the Decade of Education for Sustainable Development (DESD), established by the United Nations for 2005 through 2014. DESD initiatives will address education, corporate citizenship, and network building for a sustainable future. INSTRUCTIONS Outline how the DESD might impact future trade policies. Consider the effect of trade policies on the environment and human rights.

Your Ethics Some decisions you will face have no clear-cut answers and require choosing between actions that could hurt someone close to you. PERSONAL FINANCE ACTIVITY Review the five key principles discussed on pages 836–837. Write a report describing situations in which a high school student would need to apply the principles. Provide one situation for each principle. PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and click on Student Center. Click on Making It Personal and select Chapter 29.

Corporate Responsibility An ethical corporation makes a commitment to manage its roles in society— as a producer, employer, customer, and citizen—in a responsible manner. Implementing policies and practices in these areas is generally considered sound management. Many companies publish their commitment to corporate responsibility in their annual reports. Fallen Giants INSTRUCTIONS Use PETsMART’s statement of corporate Many people are affected responsibility in Appendix F for these activities. by accounting scandals and 1. Explain why it is crucial for a board of directors to corporate failures. Go to be independent from management. glencoeaccounting 2. Identify any key principles of conduct discussed .glencoe.com and click on Student Center. Click on on pages 836–837 that this statement of WebQuest and select Unit 6 to responsibility addresses. continue your Internet project. 3. In what areas does management want its financial statement users to have confidence?

Chapter 29 Real-World Applications and Connections

830-846_CH29_868829.indd 846

9/15/05 2:34:16 PM

PHOTO CRE DIT S Cover photography by: Royalty-free/CORBIS CV(tr); Jordan Miller Photography CV(center); Winfried Wisniewski/Age Fotostock CV(b); Ariel Skelley/CORBIS CV(br). Phil Banko/Getty Images 142; Paul Barton/CORBIS 55, 828–829(b); Peter Beck/ CORBIS 35; Bettman/CORBIS x, 162; Robert Brenner/PhotoEdit 31(tl); Keith Brofsky/ Photodisc Blue/Getty Images 500; Frak Chmura/ImageState 770; Ralph A. Clevenger/ CORBIS 555(br); CoverSpot/Alamy Images x, 194; Francisco Cruz/SuperStock 92; Kayte M. Deioma/PhotoEdit xii, 276; Doris DeWitt/Getty Images 481; Steve Dunwell/Index Stock 26; Gary Edwards/Zefa/Getty Images 798; Macduff Everton/CORBIS 94; Chris Farina/CORBIS 49; Najlah Feanny/CORBIS 751; Jon Feingersh/Masterfile 785; Sandy Felsenthal/CORBIS xv, 480; Fisher/Thatcher/Getty Images 219; Tom Fox/Dallas Morning News/CORBIS 103; Graham French/Masterfile 6; Bob Gelberg/Masterfile 658; Getty Images xvi, xix, 550, 750; Kim Gloding/Getty Images 382; Rick Gomez/Masterfile 339; Spencer Grant/PhotoEdit 645; Jeff Greenberg/PhotoEdit 7,18(c), 347; Charles Gupton/CORBIS 120, 842; R.W. Hapke/ CORBIS 140; Walter Hodges/CORBIS 782–783, 831; Image Source/SuperStock 617; Sean Justice/Photonica/Getty Images 742; Wolfgang Kaehler/CORBIS 778; Zigy Kaluzny/Getty Images 40; Bonnie Kamin/PhotoEdit 641; Ray Katchatorian/Stocn/Getty Images 708; Ronnie Kaufman/CORBIS 587; Michael Keller/CORBIS 236; Shuji Kobayashi/Getty Images 34; Kim Kulish/CORBIS ix, 130, 131; Owaki-Kulla/CORBIS 30(tl); Javier Larrea/Age Fotostock America, Inc. 434, 506; Boden/Ledingham/Masterfile 30(tr); Stephen Lengnick/Plum Street Studio 669; Rob Lewine/CORBIS 317(br); R. Ian Loyd/Masterfile 731; Dennis MacDonald/ Age Fotostock 66; Tim Mantoani/Masterfile 2–3, 808; Simon Marcus/CORBIS xv, 516, 517; Stephanie Maze/CORBIS 697; Tom & Dee Ann McCarthy/CORBIS 163; Jordan Miller Photography 638–639; Zoran Milich/Masterfile 18(t); Warren Morgan/CORBIS 793; MTPA Stock/Masterfile 317(tr); David Muir/Masterfile 31(tr); Michael Newman/PhotoEdit 112, 559, 807; Andrew Olney/Masterfile 18(b); Scott Olsen/Getty Images 482; Gregory Pace/ CORBIS viii, 48; Panda Express 77; Jose Louis Pelaez, Inc./CORBIS 415, 472; Courtesy of Petsmart A-42, A-43, A-45; Photographer’s Choice/Getty Images 192; Photonica 379; PM Images/Getty Images 14; Posing Productions/Photonica 727; John Prince/ImageState 833; Alec Pytlowany/Masterfile 818; Jose Fuste Raga/Zefta/CORBIS 555(tr); Patrick Ramsey/ ImageState 630; Roger Ressmeyer/CORBIS 375, 449; Reuters/CORBIS 438; Jon Riley/Getty Images 320; Rommel/Masterfile 688; Royalty-free/BananaStock/Alamy Images 304; Royaltyfree/BananaStock/Imagestate 582; Royalty-free/Blue Moon Stock/Alamy Images 240; Royaltyfree/Brand X Pictures/Getty Images 210; Royalty Free/CORBIS(Royalty-free) xiii, 46–47, 51, 134, 139, 146, 149, 277, 306–307, 313, 364, 378, 625, 703, 826(b); Royalty-free/Digital Vision/Getty Images 309, 520, 552; Royalty-Free/Getty Images(Royalty-free) xii, 308, 759; Royalty-free/Image Source/CORBIS 132; Royalty-free/Image Source/SuperStock 551; Royaltyfree/iStockphoto 144; Royalty-Free/Masterfile 376-377; Royalty-free/Photodisc/Getty Images 286, 540; Royalty-free/PictureArts/CORBIS 17; Royalty-free/SuperStock 574; Alan Schein Photography/CORBIS 671; Michael Segal/SuperStock xi, 248, 249; Juan Manuel Silva/Age Fotostock America Inc. 168; Ariel Skelley/CORBIS 781, 826(tr); Adam Smith/Getty Images 152; Lee Snider/Photo Images/CORBIS 372; Justin Sullivan/Getty Images xviii, 612; SuperStock, Inc./SuperStock 179; Mario Tama/Getty Images 195; LWA-Dann Tardif/CORBIS 266; Anton Vengo/SuperStock 649; Paul Viant/Getty Images 404; Karl Wheatherly/CORBIS 321; David Williams/Alamy Images 232; Winfried Wisniewski/Age Fotostock America Inc. 5; David Young-Wolff/PhotoEdit 20, 613; Kwame Zikomo/SuperStock 418, 604.

949-950_CR-868829.indd 2

9/27/05 1:47:59 PM

A P P EN D I X ES

Appendix A

Adjustments for a Service Business Using a Ten-Column Work Sheet

Appendix B

Using the Numeric Keypad

A–14

Appendix C

Recording Transactions in the Combination Journal

A–18

Appendix D

The Accrual Basis of Accounting

A–26

Appendix E

Federal Personal Income Tax

A–36

Appendix F

Excerpts from the PETsMART, Inc. 2003 Annual Report

A–42

Appendix G

Additional Reinforcement Problems

A–52

Appendix H

Answers to Section Assessment Problems

A–70

A–2

A–1

A1-TOC-APPF-868829.indd 1

9/19/05 7:30:33 PM

APPENDIX A

BEFORE YOU

READ

Main Idea

Some general ledger accounts must be adjusted to bring their balances up to date.

Read to Learn… ➤ how to make adjusting

entries. (p. A–2) ➤ how to complete the ten-column work sheet. (p. A–6) ➤ how to journalize and post adjusting entries. (p. A–7) ➤ about the additional step in the ten-step accounting cycle. (p. A–8)

Key Terms adjustment premium

Adjustments for a Service Business Using a Ten-Column Work Sheet In Chapter 8 you prepared a six-column work sheet for a service business. If you completed Chapter 18, you prepared a ten-column work sheet for a merchandising business. The ten-column work sheet has the same additional columns whether it is used for a service or merchandising business. The additional columns are for the Adjustments and Adjusted Trial Balance sections. Information for the Account Name and Trial Balance sections comes from the general ledger accounts. Each account’s end-of-period balance is entered in the appropriate amount column of the Trial Balance section. In Chapter 8 you entered the final account balances and completed the Trial Balance section by totaling and ruling the columns.

Adjusting Entries How Do You Make Adjusting Entries? To this point the general ledger account balances have been changed by journal entries that record transactions supported by source documents. Changes in account balances caused by the internal operations of a business or the passage of time, however, have no source documents. Such changes are recorded by making adjustments to the account balances at the end of the period. An adjustment is an amount that is added to or subtracted from an account balance to bring that balance up to date. If an account balance is not up to date as of the last day of the accounting period, then that account must be updated. Adjustments help match expenses and revenue for a given accounting period. In this appendix you will learn how to calculate end-of-period adjustments for a service business, Maximum Delivery Service. Every adjustment affects at least one permanent account and one temporary account. Two examples of general ledger accounts that need adjusting at the end of the accounting period are Supplies and Prepaid Insurance.

Adjusting the Supplies Account All businesses purchase supplies such as paper, ink cartridges, and staples in order to operate. When businesses purchase supplies, the asset account Supplies is debited (increased). Supplies may be purchased by paying cash or by charging them on account.

A–2

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–2

9/12/05 6:08:06 PM

Recording the Purchase of Supplies. When a business purchases supplies for cash, the asset account Supplies is increased, so it is debited for the amount of the purchase. Cash in Bank is also an asset account, and it is decreased (credited). On February 14 Maximum Delivery Service purchased supplies for $300, Check 229.

GENERAL JOURNAL DATE 1 2

20-Feb.

3 4

DESCRIPTION

POST. REF.

PAGE DEBIT

11

CREDIT 1

14 Supplies Cash in Bank Check 229

3 0 0 00

2

3 0 0 00

3 4

5

5

When supplies are purchased on account, the Supplies account is again debited. Since additional money is owed to a creditor, the liability account Accounts Payable is credited. On August 21 Maximum Delivery Service purchased $400 worth of supplies on account from Shade Supply Company, Invoice 28714.

 ,
Ê"1,
 $!4%  

Ó䇇
Õ}°

  

$%3#2)04)/.

0/34 2%&

0!'% $%")4

£{

#2%$)4 

Ó£ -Õ««ˆià Ê
VVÌðÊ*>Þ°É-…>`iÊ-Õ««ÞÊ œ° Ê Ê ˜ÛœˆViÊÓnÇ£{

{ ä ä ää



{ ä ä ää

  

Calculating the Adjustment for Supplies. Each time Maximum Delivery Service purchases supplies, its Supplies account must be debited for the amount of the purchase. For example, Maximum Delivery Service had $100 in supplies on hand at the beginning of the period. During the period the company made two purchases of supplies for $300 and $400. The final balance in the Supplies account in the general ledger on December 31 is $800 ($100  $300  $400). However, some of these supplies were used or consumed during the period. Although businesses use supplies every day, it is inefficient to update the records of all supplies used on a daily basis. At the end of the period, Maximum Delivery Service does not have all $800 worth of supplies because most of them have been used. By examining the remaining supplies, Maximum determines that only $200 worth of the supplies are still on hand. This means that $600 of supplies have been used or consumed during the period ($800  $200  $600). The Supplies

AS YOU

READ

Instant Recall Matching Principle The matching principle requires revenue to be recorded in the same period as the expenses incurred to earn it.

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–3

A–3

4/6/06 6:49:21 PM

account balance must be adjusted to report a final balance of $200. The account balance must be reduced by $600. As supplies are used, they become expenses of the business. At the end of the period, adjustments are made to transfer the costs of the assets consumed from the asset accounts (permanent accounts) to the appropriate expense accounts (temporary accounts). Entering the Supplies Adjustment on the Work Sheet. The Adjustments section of the work sheet is used to enter the necessary adjustments for the period. Since $600 worth of supplies were used during the period, the Supplies account is decreased, or credited, for this amount. The account Supplies Expense is increased, or debited, for $600.

Adjustment ANALYSIS

Identify Classify
/

1. The accounts affected are Supplies and Supplies Expense. 2. Supplies is an asset account (permanent). Supplies Expense is an expense account (temporary). 3. Supplies is decreased by $600. Supplies Expense is increased by $600.

DEBIT-CREDIT RULE

4. Increases to expense accounts are recorded as debits. Debit Supplies Expense for $600. 5. Decreases to asset accounts are recorded as credits. Credit Supplies for $600.

T ACCOUNTS

6.

Debit
600

AS YOU

READ

Key Point Labeling Adjustments On the work sheet, an adjustment’s debit and credit parts are labeled with a lower case letter in parentheses, such as (a).

A–4

Supplies

Supplies Expense Credit 

Debit


Credit  600

The adjustment for Supplies in the Adjustments section of the work sheet is shown in Figure A–1. To enter the adjustment on the work sheet, follow these steps: 1. In the Adjustments Debit column, enter the debit amount of the adjustment ($600) on the Supplies Expense line. 2. In the Adjustments Credit column, enter the credit amount of the adjustment ($600) on the Supplies line. On the work sheet, the debit and credit parts of each adjustment are given a unique label. The label consists of a small letter in parentheses. It is placed just above and to the left of the adjustment amounts. The supplies adjustment is the first adjustment, so it is labeled (a). The next adjustment will be labeled (b), then (c), and so on.

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–4

9/12/05 6:08:24 PM

Maximum Delivery Service Work Sheet For the Year Ended December 31, 20-TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

ACCOUNT NAME

DEBIT

Cash in Bank Accts. Rec.—Wein Corp. Accts. Rec.—Mike Cassidy Supplies Prepaid Insurance Office Equipment Delivery Equipment Accts. Pay.—Gillespie Co. Accts. Pay.—Shade Supply Co. Accts. Pay.—Trip Travel Kevin Chan, Capital Kevin Chan, Withdrawals Income Summary Delivery Revenue Advertising Expense Insurance Expense Maintenance Expense Rent Expense Supplies Expense Utilities Expense Totals

101 105 110 115 120 125 130 201 205 210 301 302 303 401 501 505 510 515 520 525

21

ADJUSTMENTS

CREDIT

ADJUSTED TRIAL BALANCE

CREDIT

DEBIT

7 2 6 4 00 3 3 6 00 9 1 7 00 8 0 0 00 7 5 0 00 11 3 6 4 00 14 6 0 0 00

DEBIT

1 774 00 2 0 0 00 2 632 00 16 7 3 4 00

1 774 00 2 0 0 00 2 632 00 16 7 3 4 00

2 500 00

2 500 00 28 7 2 4 00

28 7 2 4 00

3 0 8 3 00

3 0 8 300 2 5 000 7 1 000 6 5 0 000 6 0 000 1 2 4 0 00 8 5 000 50 0 6 400

(b) 2 5 000

7 1 0 00 6 5 0 0 00 (a) 6 0 000

1 2 4 0 00 50 0 6 4 00

CREDIT

7 2 6 4 00 3 3 6 00 9 1 7 00 (a) 6 0 0 00 2 0 0 00 (b) 2 5 0 00 5 0 0 00 11 3 6 4 00 14 6 0 0 00

50 0 6 4 00

8 5 000

50 0 6 4 00

22

Figure A–1 Ten-Column Work Sheet (Partial) Showing the Adjusted Trial Balance

Adjusting the Prepaid Insurance Account Businesses buy insurance to protect against losses from hazards such as theft, fire, and flood. Insurance policies cover varying time periods, such as six months or one year. The cost of insurance protection is called the premium . A premium is paid in advance at the beginning of the covered period. Insurance paid in advance is an asset because, until the insurance protection expires, it represents a benefit to the business. The insurance premium is recorded in the asset account Prepaid Insurance. On November 1 Maximum Delivery Service paid a six-month insurance premium of $750, Check 314.

GENERAL JOURNAL DATE 1 2

20-Nov.

3 4 5

DESCRIPTION

POST. REF.

PAGE DEBIT

19

CREDIT 1

1 Prepaid Insurance Cash in Bank Check 314

7 5 0 00

2

7 5 0 00

3 4 5

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–5

A–5

9/12/05 6:08:24 PM

At the end of December, the balance in the Prepaid Insurance account is still $750. However, two months of the six months of coverage have expired. Nov. 1–Dec. 31 Expired $250


Jan. 1–Apr. 30 Not Expired $500 

$750

The monthly cost of the insurance is $125 ($750  6  $125). Since the coverage for November and December has expired, $250 ($125  2) of the $750 in the premium has been used. The asset account Prepaid Insurance must be decreased (credited) for $250. The amount of insurance expired is charged to the expense account Insurance Expense. In this adjustment Insurance Expense is debited for $250.

Adjustment ANALYSIS

Identify Classify
/

1. The accounts affected are Prepaid Insurance and Insurance Expense. 2. Prepaid Insurance is an asset account (permanent). Insurance Expense is an expense account (temporary). 3. Prepaid Insurance is decreased by $250. Insurance Expense is increased by $250.

DEBIT-CREDIT RULE

4. Increases to expense accounts are recorded as debits. Debit Insurance Expense for $250. 5. Decreases to asset accounts are recorded as credits. Credit Prepaid Insurance for $250.

T ACCOUNTS

6.

Insurance Expense Debit
250

Credit 

Prepaid Insurance Debit


Credit  250

To enter the adjustment on the work sheet, follow these steps: 1. In the Adjustments Debit column, enter the debit amount of the adjustment ($250) on the Insurance Expense line. Since this is the second adjustment, label it (b). 2. In the Adjustments Credit column, enter the credit amount of the adjustment ($250) on the Prepaid Insurance line. Label it (b) also.

Completing the Work Sheet How Do You Complete the Ten-Column Work Sheet? After the adjustments have been entered on the work sheet, the Adjusted Trial Balance section can be completed. This section of the work sheet shows the updated balances of all general ledger accounts.

A–6

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–6

9/12/05 6:08:26 PM

Completing the Adjusted Trial Balance Section To complete this section, the balance of each account in the Trial Balance section is combined with the adjustment, if any, in the Adjustments section. The new balance is then entered in the appropriate Adjusted Trial Balance column. Refer to Figure A–2 on pages A–8 and A–9 and look at how new balances are computed. If there is no adjustment, the account balance shown on the Trial Balance section is simply extended to the same column (Debit or Credit) in the Adjusted Trial Balance section. After all account balances have been extended to the Adjusted Trial Balance section, both columns are totaled. If total debits equal total credits, this section is proved. A double rule is drawn under the totals and across both columns.

Extending Amounts to the Balance Sheet and Income Statement Sections Beginning with line 1, each account balance in the Adjusted Trial Balance section is extended to the appropriate column of either the Balance Sheet section or the Income Statement section. Remember that the Balance Sheet section includes the asset, liability, and owner’s equity accounts. The Income Statement section includes the revenue and expense accounts.

Showing Net Income on the Work Sheet The Income Statement and Balance Sheet sections of the work sheet are totaled. The net income (or net loss) is entered on the work sheet as shown in Figure A–2.

Journalizing and Posting the Adjusting Entries How Do You Record and Post Adjustments? The journal entries that update the general ledger accounts at the end of a period are called adjusting entries. The source of information for journalizing the adjusting entries is the Adjustments section of the work sheet. The accounts debited and credited in the Adjustments section are entered in the general journal. Before recording the first adjusting entry, the words Adjusting Entries are written in the Description column of the general journal. This heading eliminates the need to write an explanation after each adjusting entry. The first adjustment, labeled (a) on the work sheet, is recorded in the general journal as a debit to Supplies Expense for $600 and a credit to Supplies for $600. The second adjustment is a debit to Insurance Expense for $250 and a credit to Prepaid Insurance for $250. After the adjusting entries have been recorded in the general journal, they are posted to the general ledger accounts. Once the adjusting entries have been posted, the general ledger accounts are up to date. Refer to Figure A–3 on page A–10 to see how to record end-of-period adjustments and update accounts through adjusting entries.

AS YOU

READ

Key Point Adjusting Journal Entries The Adjustments section of the work sheet is the source for the adjusting journal entries entered in the general journal.

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–7

A–7

9/12/05 6:08:27 PM

The Steps in the Accounting Cycle What Is the Additional Step in the Ten-Step Accounting Cycle? There are additional general ledger accounts that need to be adjusted at the end of the period. The reasons and procedures for adjusting other accounts are presented throughout this textbook. Figure A–2 Work Sheet Showing Ending Adjusted Balances and Net Income

Maximum Work For Year Ended TRIAL BALANCE

ACCT. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

101 105 110 115 120 125 130 201 205 210 301 302 303 401 501 505 510 515 520 525

ACCOUNT NAME

Cash in Bank Accts. Rec.—Wein Corp. Accts. Rec.—Mike Cassidy Supplies Prepaid Insurance Office Equipment Delivery Equipment Accts. Pay.—Gillespie Co. Accts. Pay.—Shade Supply Co. Accts. Pay.—Trip Travel Kevin Chan, Capital Kevin Chan, Withdrawals Income Summary Delivery Revenue Advertising Expense Insurance Expense Maintenance Expense Rent Expense Supplies Expense Utilities Expense

21 22

DEBIT

ADJUSTMENTS

CREDIT

CREDIT

DEBIT

7 2 6 4 00 3 3 6 00 9 1 7 00 8 0 0 00 7 5 0 00 11 3 6 4 00 14 6 0 0 00

(a) (b)

6 0 0 00 2 5 0 00

1 77400 2 0 0 00 2 63200 16 7 3 4 00 2 500 00 28 7 2 4 00 3 0 8 3 00 (b)

2 5 000

(a)

6 0 000

7 1 0 00 6 5 0 0 00 1 2 4 0 00 50 0 6 4 00 50 0 6 4 00

8 5 000

8 5 000

Net Income

23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

A–8

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–8

9/12/05 6:08:27 PM

When adjustments are made at the end of the period, this procedure becomes an additional step in the accounting cycle. After Step 7, Prepare financial statements, Step 8 is Journalize and post the adjusting entries. The final two steps in the cycle remain the same. We now have a ten-step cycle instead of a nine-step cycle.

Figure A–2 Work Sheet Showing Ending Adjusted Balances and Net Income (continued)

Delivery Service Sheet December 31, 20-ADJUSTED TRIAL BALANCE DEBIT

CREDIT

INCOME STATEMENT DEBIT

CREDIT

7 2 6 4 00 3 3 6 00 9 1 7 00 2 0 0 00 5 0 0 00 11 3 6 4 00 14 6 0 0 00

BALANCE SHEET DEBIT

CREDIT

7 2 6 4 00 3 3 6 00 9 1 7 00 2 0 0 00 5 0 0 00 11 3 6 4 00 14 6 0 0 00 1 774 00 2 0 0 00 2 632 00 16 7 3 4 00

1 2 3 4 5 6 7

1 77400 2 0 0 00 2 632 00 16 7 3 4 00

2 50000

2 50000

8 9 10 11 12 13

28 7 2 4 00 3 0 8 300 2 5 000 7 1 000 6 5 0 000 6 0 000 1 2 4 0 00 50 0 6 400

28 7 2 400

3 0 8 3 00 2 5 0 00 7 1 0 00 6 5 0 0 00 6 0 0 00 1 2 4 0 00 50 0 6 4 00 12 3 8 3 00 16 341 00 28 724 00

14 15 16 17 18 19 20

28 724 00

37 681 00

28 724 00

37 681 00

21 340 00 16 341 00 37 681 00

21 22 23 24 25 26

AS YOU

READ

Key Point Step 8 Journalizing and posting the adjusting entries is the 8th step in the accounting cycle. It is done after preparing the financial statements (step 7) and before journalizing and posting the closing entries (step 9).

27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–9

A–9

9/12/05 6:08:30 PM

GENERAL JOURNAL DATE 1 2

20-Dec.

3 4 5

PAGE

POST. REF.

DESCRIPTION

Adjusting Entires 31 Supplies Expense Supplies 31 Insurance Expense Prepaid Insurance

DEBIT

22

CREDIT 1

520 115 505 120

6 0 0 00

2

6 0 0 00

3

2 5 0 00

4

2 5 0 00

5

6

6

ACCOUNT Supplies DATE

20-Jan. Feb. Aug. Dec.

ACCOUNT NO. 115

DESCRIPTION

1 Balance 14 21 31 Adjusting Entry

BALANCE

POST. REF.

DEBIT

CREDIT

DEBIT

100 400 800 200

3 0 0 00 4 0 0 00

G11 G14 G22

6 0 0 00

ACCOUNT Prepaid Insurance DATE

20-Nov. Dec.

DESCRIPTION

1 31 Adjusting Entry

20-Dec.

00 00 00 00

ACCOUNT NO. 120 BALANCE

POST. REF.

DEBIT

G19 G22

CREDIT

DEBIT

7 5 0 00 2 5 0 00

ACCOUNT Insurance Expense DATE

CREDIT

DESCRIPTION

31 Adjusting Entry

CREDIT

7 5 0 00 5 0 0 00

ACCOUNT NO. 505 BALANCE

POST. REF.

DEBIT

G22

2 5 0 00

CREDIT

DEBIT

2 5 0 00

ACCOUNT Supplies Expense DATE

20-Dec.

DESCRIPTION

31 Adjusting Entry

CREDIT

ACCOUNT NO. 520 BALANCE

POST. REF.

DEBIT

G22

6 0 0 00

CREDIT

DEBIT

CREDIT

6 0 0 00

Figure A–3 Adjusting Entries Posted to the General Ledger

A–10

Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet

A02-A13_AppA_868829.indd A–10

9/12/05 6:08:34 PM

Problems

APPE NDIX A

Problem A–1 Analyzing Adjustments Information related to accounts requiring adjustments on the work sheet for the year ended December 31 for Magner’s Advertising Center follows.

Instructions In your working papers, identify the amount of each adjustment, which account is debited, and which account is credited. 1. The Trial Balance section shows a balance of $4,239.80 for Supplies. The amount of supplies actually on hand at the end of the period is $912.15. 2. Magner’s paid an annual insurance premium of $4,920.00 on October 1.

Problem A–2 Analyzing Adjustments Ace Advertising Agency has the following information regarding supplies. The beginning balance in the general ledger account Supplies on August 1 was $214.00. On August 13 the agency purchased $302.00 worth of supplies. On August 26 it purchased additional supplies for $176.00. At the end of August, Ace counted the supplies and determined that supplies worth $273.00 were still on hand.

Instructions Analyze the preceding information and then answer the following questions regarding the Supplies account. 1. What amount should be entered in the Trial Balance section of the work sheet for Supplies? Which column should be used? 2. What amount should be entered in the Adjustments section of the work sheet for Supplies? Which column should be used? 3. Should any other amount be entered in the Adjustments section? If yes, answer these questions: a. Which account? b. Which column? c. What amount? 4. What amounts should be entered in the Adjusted Trial Balance section? For each amount list the name of the account and specify which column should be used (Debit or Credit).

Appendix A Problems

A02-A13_AppA_868829.indd A–11

A–11

9/12/05 6:08:41 PM

Problems

A PP EN D I X A

Problem A–3 Entering Adjustments and Preparing an Adjusted Trial Balance The general ledger for Schellhorn’s Water Slide shows the following account balances on December 31, the end of the fiscal period.

Instructions In your working papers: 1. Prepare the Trial Balance section of the work sheet. The account names are entered on the work sheet. 2. Enter the adjustments for Office Supplies and Prepaid Insurance in the Adjustments section. The data for the adjustments is as follows: a. The amount of supplies on hand on December 31 is $492. b. The insurance premium expired is $860. 3. Extend the amounts and complete the Adjusted Trial Balance section. 101 105 110 115 120 125 130 201 205 210 301 302 303 401 501 505 510 515 520 525

A–12

Cash in Bank Accts. Rec.—Chiara Adin Accts. Rec.—Miguel Hendrickson Office Supplies Prepaid Insurance Office Equipment Water Slide Equipment Accts. Pay.—Northern Slide Co. Accts. Pay.—Advertising World Accts. Pay.—Merit Cleaning Phil Schellhorn, Capital Phil Schellhorn, Withdrawals Income Summary Slide Revenue Advertising Expense Insurance Expense Maintenance Expense Rent Expense Office Supplies Expense Utilities Expense

$10,230 519 207 1,820 1,290 3,117 14,204 6,281 1,559 332 12,641 1,400 — 29,209 1,350 — 719 12,800 — 2,366

Appendix A Problems

A02-A13_AppA_868829.indd A–12

9/12/05 6:08:42 PM

Problems

APPE NDIX A

Problem A–4 Preparing a Ten-Column Work Sheet The general ledger for Ryan’s Canoe Rentals shows the following account balances on December 31, the end of the fiscal period.

Instructions In your working papers: 1. Prepare the Trial Balance section of the work sheet. The account names are entered on the work sheet. 2. Enter the adjustments for Office Supplies and Prepaid Insurance in the Adjustments section. The data for the adjustments is as follows: a. Ryan’s determines that 20 percent of the supplies purchased are still on hand on December 31. b. The insurance premium expired is $1,337. 3. Extend the amounts and complete the Adjusted Trial Balance section. 4. Extend the appropriate amounts to the Balance Sheet and Income Statement sections and determine the net income or net loss for the period. 101 105 110 115 120 125 130 135 201 205 210 301 305 310 401 402 501 505 510 515 520 525

Cash in Bank Accts. Rec.—Nancy Burrows Accts. Rec.—Patrick Chang Supplies Prepaid Insurance Office Equipment Rental Equipment Canoes Accts. Pay.—South Canoe Co. Accts. Pay.—H & T Advertising Accts. Pay.—Cassidy’s Equipment Ryan Gillespie, Capital Ryan Gillespie, Withdrawals Income Summary Rental Revenue Lesson Revenue Advertising Expense Insurance Expense Maintenance Expense Rent Expense Supplies Expense Utilities Expense

$13,826 803 519 2,880 2,292 3,117 14,204 20,182 6,991 2,046 855 38,619 3,700 — 31,624 3,475 2,730 — 1,664 14,900 — 2,793

Appendix A Problems

A02-A13_AppA_868829.indd A–13

A–13

9/12/05 6:08:44 PM

APPENDIX B

BEFORE YOU

READ

Main Idea

Using a numeric keypad by touch will help you enter numbers quickly and accurately.

Read to Learn… ➤ about the key locations.

(p. A–14) ➤ how to enter numbers by

touch. (p. A–15)

Key Terms home keys

Using the Numeric Keypad Electronic calculators and computer keyboards have ten-key numeric keypads. When you key numerical data, your ability to use the numeric keypad by touch will make your task easier and faster.

Locating Keys How Are Keys Arranged on a Numeric Keypad? The ten-key numeric keypad 7 8 9 7 8 9 is usually arranged in four rows 4 5 6 4 5 6 of three keys. The locations of the 1 to 9 keys are the same on all equip1 2 3 1 2 3 ment. The locations of the 0 (zero), decimal, Enter, and other function Ø Ø keys vary. Some typical arrangements are illustrated here. On the ten-key numeric keypad, the ( ) — + 4-5-6 keys are called 9 0 = 7 8 9 the home keys . O P [ ] 4 5 6 These keys are the “start: " ing point” from which 1 2 3 L ; ' you operate the other < > ? , . Ø . / number keys. The index finger of your right hand should rest on the 4 key, your middle finger on the 5 key, and your ring finger on the 6 key. Most keypads have a special “help” on the home keys so you can easily locate them: the 5 key may have a raised dot or the surfaces of the 4-5-6 keys may be concave (indented). From the home keys, you reach up or down to tap other keys. The index finger is also used for the 7 and 1 keys. The middle finger is used for the 8 and 2 keys. The ring finger is used for the 9 and 3 keys. The fingers used for the 0 (zero), decimal, and Enter keys depend on the keypad’s arrangement. On some keypads, the thumb taps the 0 (zero) key and the ring finger taps the decimal key. Depending on its location, the Enter key on a computer may be operated by the little finger or the thumb.

.

RETURN ENTER

ENTER

BACK

SPACE

RETURN

ENTER

SHIFT

A–14

ENTER

Appendix B Using the Numeric Keypad

A14-A17_AppB_868829.indd A–14

9/12/05 3:15:39 PM

On an electronic calculator, numbers are entered by using function keys: plus (
), minus (), multiply (), divide (), and so on. A computer keypad has different function keys for multiply (*) and divide (/). On an electronic calculator, the asterisk (*) is used for the total. The fingers used to operate these keys depend on the keys’ location on the keyboard. Locate these keys on your keypad and determine the correct fingers to use to operate them.

Entering Numbers by Touch How Do You Use the Keys by Touch? Throughout the remaining pages of this appendix, you will demonstrate use of the numeric keypad by touch. That is, you will enter numbers on the keypad without looking at your fingers. Your practice consists of adding columns of numbers. If you are using an electronic calculator, tap the plus (
) key after you have entered a number in a column. After entering all the numbers in a column, tap the total (*) key. If you are using a computer spreadsheet program, tap the Enter key after you have entered a number in a column. This will force a line break; each time you strike the Enter key, the cursor will move to the next line. After entering all the numbers in a column, use the software function or formula to add the numbers.

Using the 4-5-6 Keys 1. Demonstrate use of the numeric keypad by touch. 7 8 9 Locate the 4-5-6 keys (the home keys) on your keypad. 4 5 6 Also locate the Enter key if you are using a computer or the plus key if you are using a calculator. 1 2 3 2. Place your index finger on the 4 key, your middle finger on the 5 key, and your ring finger on the 6 key. Ø 3. To enter a number, tap the number keys, one at a time, in the same order as you read the digits from left to right. Always keep your fingers on the home keys. 4. When you have entered the last digit, tap the Enter key (computer) or the plus key (calculator). 5. Using the following problems, practice entering columns of numbers at a comfortable pace until you feel confident about each key’s location. 6. After entering all of the numbers in a column, add the numbers using the software (computer) or tap the total key once (calculator).

.

1. 444 555 666 456 564 646

2. 555 666 444 654 546 465

3. 666 454 545 446 646 546

4. 456 654 465 556 656 465

5. 554 445 564 664 565 655

ENTER

6. 664 445 566 645 465 654

Appendix B Using the Numeric Keypad

A14-A17_AppB_868829.indd A–15

A–15

9/12/05 3:15:43 PM

Using the 1, 7 and 0 Keys 1. Demonstrate use of the numeric keypad by touch. 7 8 9 Locate the 1, 7 and 0 (zero) keys on your keypad. 4 5 6 2. Place your fingers on the home keys. 3. Practice the reach from the home keys to each new 1 2 3 key. Reach down to the 1 key and up to the 7 key with ENTER your index finger. Be sure to return your finger to the Ø home keys after tapping the 1 and 7 keys. Strike the 0 (zero) key with your thumb. 4. Using the following problems, practice adding columns of numbers containing the new keys. Practice at a comfortable pace until you feel confident about each key’s location. Be sure to keep your fingers in home-key position. 1. 2. 3. 4. 5. 6. 444 014 140 107 011 141 471 107 701 074 170 117 174 740 701 104 710 417 741 101 704 007 004 047 710 114 471 411 471 104 407 441 117 047 174 114

.

Using the 3 and 9 Keys 1. Locate the 3 and 9 keys on your keypad. 7 8 9 2. Place your fingers on the home keys. 4 5 6 3. Practice the reach from the home keys to each new key. Reach down to the 3 key and up to the 9 key with 1 2 3 your ring finger. Be sure to return your finger to the home keys after tapping the 3 and 9 keys. Ø 4. Using the following problems, practice adding columns of numbers containing the new keys. Practice at a comfortable pace until you feel confident about each key’s location. Be sure to keep your fingers in home-key position. 1. 2. 3. 4. 5. 6. 666 669 339 966 939 699 999 663 363 393 363 936 333 936 336 966 393 939 963 396 936 633 639 336 639 936 636 393 369 696 399 363 996 993 369 939

.

ENTER

Using the 2 and 8 Keys 1. Locate the 2 and 8 keys on your keypad. 2. Place your fingers on the home keys. 3. Practice the reach from the home keys to each new key. Reach down to the 2 key and up to the 8 key with your middle finger. Be sure to return your finger to the home keys after tapping the 2 and 8 keys.

A–16

7

8

9

4

5

6

1

2

3

Ø

.

ENTER

Appendix B Using the Numeric Keypad

A14-A17_AppB_868829.indd A–16

9/12/05 3:15:47 PM

4. Using the following problems, practice adding columns of numbers containing the new keys. Practice at a comfortable pace until you feel confident about each key’s location. Be sure to keep your fingers in home-key position. 1. 2. 3. 4. 5. 6. 555 228 885 285 582 828 888 852 285 258 558 825 222 522 825 525 582 852 582 252 588 858 825 258 822 528 258 582 525 885 522 855 852 825 582 282

Using the Decimal Key 1. Locate the decimal key on your keypad. 7 8 9 2. Place your fingers on the home keys. 3. Depending on the arrangement of keys on your 4 5 6 numeric keypad, you may use your thumb, your 1 2 3 middle finger, or your ring finger to tap the decimal key. Practice the reach from the home keys to the Ø decimal key. Be sure to return your finger to the home keys after tapping the decimal key. 4. Using the following problems, practice adding columns of numbers containing the decimal key. Practice at a comfortable pace until you feel confident about the key’s location. Be sure to keep your fingers in home-key position. 1. 2. 3. 4. 5. 6. .777 .978 .998 8.78 7.88 8.79 .888 .987 .879 8.89 7.87 7.98 .999 .878 .787 8.87 8.97 9.89 .789 .987 .878 7.88 9.77 9.87 .897 .789 .797 9.87 7.97 7.89 .978 .797 .899 7.98 8.79 9.78

.

7. 468. .489 214.2 7.12 6,394.4 .58

8. 48.2 2,537. 852. 3.978 257.0 .2684

13. 14. 267.50 425.21 4.19 414.50 87.64 1,684.84 654.84 49.95 1,750.67 720.65 141.82 77.61

9. .8 5,827. .024 18.73 85.00 1.045

10. 284.0 100. 8.45 56.0 23.00 .89

11. 41.87 4,057.4 89.45 2.25 20.0 36.248

ENTER

12. 154.88 888. .0082 200.08 632.48 64.1

15. 16. 17. 18. 1.25 467.54 65.27 9.78 0.18 95.14 102.38 5.94 585.56 6,926.95 8,216.58 652.25 7.50 35.00 1,852.84 3,782.70 11.60 7.13 4.60 39.25 23.55 154.95 79.15 36.87

Appendix B Using the Numeric Keypad

A14-A17_AppB_868829.indd A–17

A–17

9/12/05 3:15:48 PM

Recording Transactions in the Combination Journal

APPENDIX C

BEFORE YOU

Businesses with a large volume of financial transactions use special journals to record those transactions. If you completed Chapters 16 and 17, you learned that special journals are designed for recording a specific type of business transaction. For example the sales journal is used to record the sale of merchandise on account. Although the use of special journals is ideal for large businesses, they are not practical for small service and retail businesses that usually have only one accounting clerk. It is impractical for one clerk to record transactions in five different journals. At the same time, using only a general journal is very time consuming. Many small businesses use one journal—a combination journal.

READ

Main Idea

Small businesses often use a multicolumn combination journal that combines the features of the general journal and the special journals into one book of original entry.

Read to Learn…

Using the Combination Journal

➤ how to use the

How Do You Use a Combination Journal?

combination journal. (p. A–18) ➤ posting the journal’s columns. (p. A–19)

Key Terms

combination journal

Figure C–1 The Combination Journal

As its name implies, a combination journal is a multicolumn journal that combines the features of the general journal and the special journals into one book of original entry. Like special journals, the combination journal has special amount columns to record transactions that occur frequently. It also has General Debit and Credit columns for recording transactions for which there are no special amount columns. Therefore all the transactions of a business can be recorded in a single, multicolumn journal. A business designs its combination journal to fit its own special needs. The number of columns and the selection and arrangement of the special columns depend on the type of business and the transactions that occur. Most combination journals have between 10 and 13 columns. The arrangement of the columns varies from one business to another. The columns should be arranged to make recording and posting easy and accurate. For example, look at On Your Mark Athletic Wear’s combination journal in Figure C–1. The Date, Account Name, Document Number, and Posting Reference columns are located at the far left. These columns are followed by the General Debit and Credit columns.

COMBINATION DATE

ACCOUNT NAME

DOC. NO.

POST. REF.

GENERAL DEBIT

CREDIT

ACCOUNTS RECEIVABLE DEBIT

CREDIT

1 2 3

A–18

Appendix C Recording Transactions in the Combination Journal

A18-A25_AppC_868829.indd A–18

9/12/05 6:11:43 PM

The General columns are followed by the special amount columns for Accounts Receivable, Sales, Sales Tax Payable, Accounts Payable, Purchases, and Cash in Bank. Notice that the line numbers appear to the left and right sides of each page of the journal. These line numbers help the accounting clerk avoid writing amounts on the wrong lines. A properly designed combination journal can be used efficiently for recording every possible business transaction. • • • • • • •

AS YOU

READ

Key Point Recording Transactions When recording transactions, use the line numbers as a guide to avoid writing amounts on the wrong line.

Receipts of cash are recorded in the Cash in Bank Debit column. Cash payments are entered in the Cash in Bank Credit column. The purchase of merchandise, for cash or on account, is recorded in the Purchases Debit column. Transactions affecting creditor accounts are written in the Accounts Payable Debit and Credit columns. The sale of merchandise is recorded in the Sales Credit and Sales Tax Payable Credit columns. Transactions affecting charge customer accounts are entered in the Accounts Receivable Debit and Credit columns. General ledger accounts for which there are no special columns are recorded in the General Debit and Credit columns. Adjusting and closing entries, for example, would be recorded in the General Debit and Credit columns.

AS YOU

READ

Key Point Recording Transactions The General columns are used to record any amount for which no special columns are provided.

On Your Mark Athletic Wear’s business transactions for the month of June are recorded in the combination journal shown in Figure C–2.

Proving and Posting the Journal What Columns Are Posted Daily? Monthly? Like special journals, an important feature of the combination journal is that it saves time in both recording and posting transactions. The amounts entered in the General columns are posted on a daily basis to the appropriate general ledger accounts. Amounts entered in the Accounts Receivable and Accounts Payable columns are also posted on a daily basis to the appropriate charge customer or creditor accounts in the accounts receivable and accounts payable subsidiary ledgers. At the end of the month, the combination journal is footed, proved, totaled, and ruled. Totals of the special amount columns of the combination journal are then posted to the general ledger accounts named in the column headings. Figure C–2 shows how the combination journal will look at the end of the month after all postings have been made.

JOURNAL SALES CREDIT

PAGE SALES TAX PAYABLE CREDIT

ACCOUNTS PAYABLE DEBIT

CREDIT

PURCHASES DEBIT

CASH IN BANK DEBIT

CREDIT 1 2 3

Appendix C Recording Transactions in the Combination Journal

A18-A25_AppC_868829.indd A–19

A–19

9/12/05 6:11:50 PM

COMBINATION DATE 1 2

20-June

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

DOC. NO.

ACCOUNT NAME

6 Cash Sales 8 Sales Discounts Casey Klein 10 Tammy’s Fitness Club 13 Office Equipment Geary Office Supply 14 Sales Returns and Allowances Sales Tax Payable Lara Young 15 Gabriel Ramos Shashi Rahim 16 Computer Solutions 18 Supplies Geary Office Supplies 21 FastLane Athletics Purchases Discounts 23 Utilities Expense 24 Purchases 26 Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees’ Federal Income Tax Payable Employees’ State Income Tax Payable 26 Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable 27 Supplies 28 Champion Store Supply Purchases Returns and Allowances 29 Supplies 30 Purchases 30 Totals

POST. REF.

T61 — R62 405 ✓ S75 ✓ I011 145 ✓ CM5 410 220 ✓ M12 ✓ ✓ I003 ✓ I214 130 ✓ CK350 ✓ 510 CK351 680 CK352 — CK353 665 212 213 205 206 P.Reg. 657 212 213 214 215 CK354 130 DM10 ✓ 515 M13 130 501

36

GENERAL DEBIT

ACCOUNTS RECEIVABLE

CREDIT

DEBIT

CREDIT

8 00 4 2 4 00 5 3 0 00 6 5 0 00 9 0 00 5 40 9 5 40 8 0 00 8 0 00 1 0 0 00

6 00 1 7 5 00 3 2 0 0 00 1 9 8 40 4 6 40 4 8 0 00 7 0 40 4 5 6 00 1 9 8 40 4 6 40 2 5 60 1 8 5 60 5 0 0 00 9 0 00 1 2 5 00 5 3 0 9 40

5 3 0 940 (✓)

1 2 5 00

1 4 7 2 20

1 4 7 2 20 (✓)

6 1 0 00

6 1 0 00 ( 115 )

5 9 9 40

5 9 9 40 ( 115 )

37

Daily Post each individual amount in the General columns to the general ledger. Put the general ledger account number in the Post. Ref. column to indicate that posting has been completed.

Daily Post each individual amount in the Accounts Receivable columns to the accounts receivable subsidiary ledger. Put a check mark in the Post. Ref. column to indicate that posting has been completed.

Daily Post each individual amount in the Accounts Payable columns to the accounts payable subsidiary ledger. Put a check mark in the Post. Ref. column to indicate that posting has been completed.

Figure C–2 Recording Transactions in a Combination Journal

A–20

Appendix C Recording Transactions in the Combination Journal

A18-A25_AppC_868829.indd A–20

9/12/05 6:11:53 PM

JOURNAL SALES CREDIT

7

PAGE SALES TAX PAYABLE CREDIT

ACCOUNTS PAYABLE DEBIT

CREDIT

PURCHASES DEBIT

CASH IN BANK DEBIT

CREDIT 1

1 2 5 0 00

7 5 00

1 3 2 5 00 4 1 6 00

2 3 4

5 0 0 00

3 000

5 6

6 5 0 00

7 8 9 10 11 12

4 2 0 0 00

4 2 0 0 00

13 14

1 0 0 00

15

2 0 0 00

16

1 9 4 00 1 7 5 00 3 0 0 00

3 0 0 00

17 18 19 20 21 22 23

2 4 0 4 80

24 25 26 27 28 29

5 0 0 00 9 0 00

30 31 32 33 34

1 7 5 0 00

1 7 5 0 00 ( 401)

1 0 5 00

1 0 5 00 ( 220)

2 9 0 00

2 9 0 00 ( 201)

4 9 5 0 00

4 9 5 0 00 ( 201)

4 5 0 0 00

4 5 0 0 00 ( 501 )

1 7 4 1 00

1 7 4 1 00 ( 101)

3 5 7 3 80

3 5 7 3 80 ( 101)

35 36 37

End of Month Post the column totals for Accounts Receivable, Sales, Sales Tax Payable, Accounts Payable, Purchases, and Cash in Bank to the general ledger. The General column totals are not posted. Put the general ledger account numbers in parentheses below the column totals to indicate that posting has been completed.

Figure C–2 Recording Transactions in a Combination Journal (continued)

Appendix C Recording Transactions in the Combination Journal

A18-A25_AppC_868829.indd A–21

A–21

9/12/05 6:11:57 PM

Problems

A PP EN D I X C

Problem C–1 Analyzing Transactions for Combination Journal Entries John Dunn owns The Country Store, a small retail store. He uses a combination journal with the following columns. General Debit General Credit Accounts Receivable Debit Accounts Receivable Credit Sales Credit Sales Tax Payable Credit

Accounts Payable Debit Accounts Payable Credit Purchases Debit Cash in Bank Debit Cash in Bank Credit

Instructions Use the form provided in your working papers. For each of the following selected transactions, indicate in which column(s) of the combination journal the debit and credit parts of the entry would be recorded. The first transaction has been completed as an example.

Date Trans. Dec. 1 Debit

Accounts Receivable Sales Sales Tax Payable Cr. Cr. Cr. Dr. Cr.

General Dr.

Cash in Bank Dr.

Cr.

✓

Credit

✓ Date

Dec.

A–22

Accounts Payable Purchases Dr. Dr. Cr.

Transactions

1 Purchased a computer on account from King’s Computer Outlet. 2 John Dunn withdrew cash for personal use. 5 Sold merchandise on account to Bernard Peterson, plus sales tax. 10 Issued Credit memo 14 to Tom Tray, a charge customer, for the return of merchandise sold on account plus sales tax. 13 Issued Debit Memo 20 to Cory Distributors for the return of merchandise purchased from them on account. 15 Received a check from Bernard Peterson in full payment of his account. 18 Issued a check to Cory Distributors in payment of our account less the purchases return and less a purchases discount. 22 John Dunn invested a calculator in the business. 25 Issued a check for the monthly payroll less deductions for FICA. 25 Recorded the employer’s payroll tax liabilities for FICA taxes, federal unemployment tax, and state unemployment tax. 30 Recorded cash sales plus sales tax. 31 Recorded the adjusting entry for the office supplies consumed during the period.

Appendix C Problems

A18-A25_AppC_868829.indd A–22

9/12/05 6:11:59 PM

Problems

APPE NDIX C

Problem C–2 Recording Transactions, Totaling, Proving, and Ruling the Combination Journal Craig Glasser is a physician who operates a family medical practice, Glasser Family Medical Center. He uses the combination journal found in your working papers.

Instructions 1. Record the following transactions on page 17 of the combination journal. 2. Total, prove, and rule the combination journal. Date

Oct.

Transactions

1 Received $2,100 in medical fees from patients, Receipt 90. 2 Issued Check 414 for the cash purchase of $120 of office supplies. 4 Purchased medical supplies on account from Wharton Laboratories, Invoice 14006 for $1,950, terms n/60. 6 Craig Glasser invested medical equipment valued at $750 in the medical practice, Memorandum 30. 8 Billed a patient, Daniel O’Connell, $150 for his annual physical, Statement 40. 9 Completed lab services for Carl Fisher and billed him $160, Statement 41. 11 Purchased a new examination table (medical equipment) on account from Medical Suppliers, Invoice L163 for $1,452.50, terms n/45. 13 Billed Patricia Vallano $300 for medical services, Statement 42. 15 Issued Check 415 for $2,004.81 for the monthly salaries expense of $2,500.00 less deductions: social security tax, $155.00; Medicare tax, $36.25; employees’ federal income taxes, $209.00; employees’ state income taxes, $94.94. 15 Recorded the employer’s payroll tax liabilities: social security tax, $155; Medicare tax, $36.25; federal unemployment taxes, $20; state unemployment taxes, $145; payroll register. 18 Issued Debit memo 16 to Wharton Laboratories for $200 for the return of medical supplies purchased on account. 20 Paid the telephone bill, Check 416 for $110. 22 A check for $110 was received from John Marshall to apply on his account, Receipt 91. CONTINUE

Appendix C Problems

A18-A25_AppC_868829.indd A–23

A–23

4/6/06 6:55:49 PM

Problems

A PP EN D I X C Date

Transactions (cont.)

25

Craig Glasser withdrew $1,250 cash from the business, Check 417. 28 Received $75 from Daniel O’Connell to apply on his account, Receipt 92. 31 Completed lab services for Donna Gordon and billed her $95, Statement 43. 31 Issued Check 418 for the November rent of $900.

Problem C–3 Recording Transactions, Totaling, Proving, and Ruling the Combination Journal Sunset Surfwear is a small merchandise business specializing in a variety of surfwear items. Sunset Surfwear uses a combination journal with these amount columns. General Debit General Credit Accounts Receivable Debit Accounts Receivable Credit Sales Credit Sales Tax Payable Credit

Accounts Payable Debit Accounts Payable Credit Purchases Debit Cash in Bank Debit Cash in Bank Credit

Instructions In your working papers: 1. Record these transactions on page 12 of the combination journal. 2. Total, prove, and rule the combination journal. Date

Dec.

A–24

Transactions

1 Issued Check 151 for $700 to Pine Valley Realty for the monthly rent. 2 Received a check for $204.82 from Martha Adams in payment of her account of $209 less a discount of $4.18, Receipt 303. 3 Purchased $400 of merchandise on account from Kelley Apparel, Invoice 479 dated December 2, terms 2/10, n/30. 4 Issued Check 152 for $75 to The Knight Crier for advertisements. 5 Issued Check 153 for $230.30 to Neilson Store Equipment in payment of its invoice for $235. 6 Sent Credit Memo 35 to Alex Hamilton for damaged merchandise returned, $50 plus $2.25 sales tax. 8 Sold merchandise on account to Nate Moulder, $100 plus sales tax of $4.50, Sales Slip 205. CONTINUE

Appendix C Problems

A18-A25_AppC_868829.indd A–24

9/12/05 6:12:04 PM

Problems Date

APPE NDIX C

Transactions (cont.)

10 Discovered that $95 received on account from Helen Jan on November 16 had been journalized and posted to Harriett Junell’s account, Memorandum 16. 11 Recorded the monthly salaries of $2,100 less deductions: social security tax, $130.20; Medicare tax, $30.45; employees’ federal income taxes, $326; and employees’ state income taxes, $48.09; Check 154 for $1,565.26. 11 Recorded the employer’s payroll tax liabilities: social security tax, $130.20; Medicare tax, $30.45; federal unemployment tax, $16.80; state unemployment tax, $121.80; payroll register. 12 Sent Check 155 for $392 to Kelley Apparel in payment of Invoice 479 less a discount of $8. 15 Received $150 from Martha Adams to apply on her account, Receipt 304. 18 Issued Debit Memorandum 20 to Waverunner Designs for $25 for the return of merchandise purchased on account. 24 Sold $200 in merchandise on account to Westwood High School Athletics plus sales tax of $9, Sales Slip 206. 26 Purchased $300 of merchandise on account from Capital Accessories, Invoice 601. 28 Purchased store equipment on account from Neilson Store Equipment, $200, Invoice 609. 29 Paid a $150 electric bill for the month by issuing Check 156 to Dukane Power Company. 31 Recorded cash sales of $3,000, plus $135 sales taxes, Tape 52.

Problem C–4 Recording Adjusting and Closing Entries in a Combination Journal A partial work sheet for December 31 for In Beat CD Shop is shown in your working papers.

Instructions 1. Record the adjusting entries in the combination journal. Then total, prove, and rule the General columns of the journal. 2. Record the closing entries in the combination journal. Then total, prove, and rule the General columns of the journal.

Appendix C Problems

A18-A25_AppC_868829.indd A–25

A–25

9/12/05 6:12:06 PM

APPENDIX D

BEFORE YOU

READ

Main Idea

Accrual accounting recognizes when revenue and expenses are earned and incurred rather than when they are collected and paid.

Read to Learn… ➤ how to record accrual

entries. (p. A–26) ➤ how to record deferral

entries. (p. A–30) ➤ how to use reversing entries. (p. A–32)

Key Terms

cash basis of accounting accrual basis of accounting accruals accrued revenue accrued expense deferrals unearned revenue prepaid expense reversing entry

The Accrual Basis of Accounting Some small businesses keep their financial records on a cash basis. The cash basis of accounting recognizes and records revenues when cash is received and expenses only when cash is paid out. Often, however, cash is received and payments are made in an accounting period other than the period in which the original transaction took place. For example, a landscaping service performs work for a client in December, but the customer may not be required to pay until January of the next year. However, if the revenue is not recorded for the service performed in December, the financial statements may not present fairly the business earnings for the year just ended. To overcome this, the accounting profession requires that most businesses use what is called the accrual basis of accounting . In accrual accounting, revenues are recognized and recorded when earned, and expenses are recognized and recorded when they are actually incurred. The system for accrual accounting focuses on when earned and incurred rather than on when collected and paid. The accrual basis of accounting requires that accountants recognize revenue when the business makes a sale or performs a service, regardless of when the company receives the cash. Expenses are recognized as incurred, whether or not the business has paid out the cash. To accrue revenue means to record an amount in anticipation of future receipts and to accrue an expense means to record an amount in anticipation of a future payment. Accrual accounting involves two types of revenue and expenses: accruals and deferrals.

Accruals How Do You Record Accruals? Accruals relate to transactions which have not yet been recorded in the accounts. The word accrue means to accumulate or amass. Accruals for unrecorded revenue and expenses are required when: 1. A revenue has been earned but not yet received. For example, interest earned on a note receivable in one accounting period but not collected until the next accounting period. 2. An expense has been incurred but not yet paid. For example, you may earn wages from April 27 to April 30, but your employer may not pay your check to you until May 5.

A–26

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–26

9/15/05 2:37:18 PM

Accruals are revenues or expenses that are gradually earned or incurred over time. In order to report a company’s financial position fairly, accruals should be recognized in the accounting period in which they belong.

AS YOU

READ

Key Point

Accrued Revenue

Accrual Basis of Accounting With the accrual basis of accounting, revenue is recorded when it is earned, and expenses are recorded when they are incurred.

Accrued revenue is revenue that has been earned but not received or recorded. Examples of unrecorded accrued revenues include unpaid fees for services completed and rent earned but not yet received. The accrued revenue example that follows is for unpaid interest earned on a note receivable.

Adjustment

On December 5, 2010, Rapid Growth Co. accepted a $5,000, 90-day, 9% note receivable from a charge customer, Janie Pippa. Pippa issued the note as an extension on her charge account. Rapid Growth Co. recorded the transaction as a debit of $5,000 to Notes Receivable and a credit of $5,000 to Accounts Receivable and Janie Pippa’s account in the subsidiary ledger. On December 31, 26 days of interest had been earned (accrued) on the note receivable: $5,000
.09
26/365  $32.05. An adjusting entry is required on December 31 to record the amount of interest income earned from December 5 to December 31. ANALYSIS

Identify Classify
/

1. For the adjusting entry, the accounts Interest Receivable and Interest Income are affected. 2. Interest Receivable is an asset account. Interest Income is a revenue account. 3. Interest Receivable is increased and Interest Income is increased.

DEBIT-CREDIT RULE

4. Increases to assets are recorded as debits. Debit Interest Receivable for $32.05. 5. Increases to revenues are recorded as credits. Credit Interest Income for $32.05.

T ACCOUNTS

6.

Interest Receivable Debit  Adj. 32.05

JOURNAL ENTRY

7.

Interest Income

Credit 

Credit  Adj. 32.05

Debit 

GENERAL JOURNAL DATE 1 2 3

DESCRIPTION

Adjusting Entries 2010 Dec. 31 Interest Receivable Interest Income

POST. REF.

PAGE DEBIT

18

CREDIT 1

3 2 05

2

3 2 05

4

4

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–27

3

A–27

9/15/05 2:38:33 PM

AS YOU

READ

Key Point Adjusting Entries Adjusting entries must be recorded when (1) there are unrecorded revenues and expenses at the end of the accounting period, and (2) there are recorded revenues and expenses that must be allocated over two or more accounting periods.

On March 5, 2011, Rapid received a check from Janie Pippa for $5,110.96, the maturity value of the note ($5,000.00 principle  $110.96 interest). Of the total interest, $32.05 had been earned and recorded in the previous accounting period. The remaining $78.91 should be recorded as income earned in the current fiscal year. In the entry for the receipt of Janie’s payment, Cash in Bank is debited for $5,110.96, the total amount of cash received. Notes Receivable is credited for $5,000.00. Interest Receivable is credited for $32.05 since the amount owed has now been received. Interest Income is credited for $78.91, the amount of the interest earned that applies to the current accounting period. The entry for this transaction is shown below.

GENERAL JOURNAL DATE 1 2

2011 Mar.

3 4 5 6

DESCRIPTION

POST. REF.

PAGE DEBIT

7

CREDIT 1

5 Cash in Bank Notes Receivable Interest Receivable Interest Income Receipt 416

5 1 1 0 96

2

5 0 0 0 00 3 2 05 7 8 91

7

3 4 5 6 7

Accrued Expenses Most expenses are recorded when they are paid or when a liability is incurred. There are, however, some business expenses that have not been paid—but accrue daily—and are not recorded until an adjusting entry is made at the end of the fiscal period. Some examples of these accrued expenses are salaries or wages earned by working employees but not yet paid to them, property taxes owed but not yet paid, and interest accrued on unpaid notes payable. The example that follows shows how to calculate interest due and payable.

Adjustment On November 1, 2010, Rapid Growth Co. signed a $2,000, 90-day, 12% note payable for the purchase of equipment from Taylor Equipment. Rapid Growth Co. recorded the transaction as a debit of $2,000 to Equipment and a credit of $2,000 to Notes Payable. On December 31, 60 days of interest was owed (accrued) on the note payable: $2,000
.12
60/365  $39.45. An adjusting entry is required on December 31 to record the amount of interest expense incurred from November 1 to December 31. ANALYSIS

Identify Classify
/

A–28

1. For the adjusting entry, the accounts Interest Expense and Interest Payable are affected. 2. Interest Expense is an expense account. Interest Payable is a liability account. 3. Interest Expense is increased and Interest Payable is increased.

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–28

9/15/05 2:38:40 PM

DEBIT-CREDIT RULE

4. Increases to expenses are recorded as debits. Debit Interest Expense for $39.45. 5. Increases to liabilities are recorded as credits. Credit Interest Payable for $39.45.

T ACCOUNTS

6.

Interest Expense Credit 

Debit  Adj. 39.45

7.

JOURNAL ENTRY

Interest Payable Credit  Adj. 39.45

Debit 

GENERAL JOURNAL DATE

4 5

POST. REF.

DESCRIPTION

Dec. 31 Interest Expense Interest Payable

PAGE DEBIT

18

CREDIT

3 9 45

4

3 9 45

6

5 6

On March 5 Rapid sent a check to Taylor Equipment for $2,059.18, the maturity value of the note ($2,000.00 principal  $59.18 interest). Of the total interest expense, $39.45 was already owed as of December 31. That amount was recorded as an adjusting entry in the previous accounting period. The remaining $19.73 should be recorded as an expense for the current accounting period. In the entry for the payment of the note, Notes Payable is debited for $2,000.00. Interest Expense is debited for $19.73, the amount of interest expense incurred that applies to the current accounting period. Interest Payable is debited for $39.45 since the amount that was accrued has now been paid. Cash in Bank is credited for $2,059.18, the total amount of cash paid. The entry for this transaction is shown below. GENERAL JOURNAL DATE

7

Mar.

8 9 10 11

DESCRIPTION

5 Notes Payable Interest Expense Interest Payable Cash in Bank Check # 1597

POST. REF.

PAGE DEBIT

7

CREDIT

2 0 0 0 00 1 9 73 3 9 45

7 8 9

2 0 5 9 18

10 11

To acquire cash with which to provide services, communities impose a tax on real property. Property taxes are usually paid twice a year, with each payment covering a six-month period or one-half the annual tax.

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–29

A–29

4/6/06 6:54:41 PM

Underwood Merchandisers operates in a building on its own land. The value of the real property is $300,000. The total annual property taxes are $7,800. Underwood is located in a state where property taxes must be paid in May and November. The May payment covers the first six months of the calendar year, and the November payment covers the last six months of the calendar year. Underwood’s fiscal period ends on April 30. As a result, at the end of its fiscal period, Underwood owes property taxes of $2,600 ($7,800  4/12 or $3,900  4/6) for the months of January, February, March and April. These taxes, however, are not due to be paid until May. On April 30 Underwood makes the following adjustment to the accounting records to reflect the correct amount of property tax for the period. GENERAL JOURNAL DATE 1 2

20-Apr.

3

DESCRIPTION

POST. REF.

Adjusting Entries 30 Property Tax Expense Property Tax Payable

PAGE DEBIT

26

CREDIT 1

2 6 0 0 00

2

2 6 0 0 00

4

3 4

On May 15 Underwood wrote a check for the semiannual property tax payment of $3,900. Of this amount, $2,600 is an expense that was already charged to the prior fiscal period, and $1,300 is an expense charged to the current accounting period. The entry in May to record this payment is shown in the general journal below. GENERAL JOURNAL DATE 1 2 3 4 5

20-May

DESCRIPTION

POST. REF.

PAGE DEBIT

3

CREDIT 1

15 Property Tax Expense Property Tax Payable Cash in Bank Check 401

1 3 0 0 00 2 6 0 0 00

2 3

3 9 0 0 00

4 5

Deferrals How Do You Record Deferrals? Deferrals are for transactions that have been recorded in the accounts. The word defer means to wait or delay. Deferrals are for receipts that are not yet earned and for payments that are not yet expenses. 1. Cash may have been received but not yet earned. For example, rent received in advance when some of the rental time is in one accounting period and the balance is in the next accounting period. 2. Cash may have been paid but the expenses not incurred. For example, when premiums on insurance are paid covering part of one accounting period and the balance covers the next accounting period.

A–30

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–30

4/6/06 6:54:41 PM

Adjusting entries are required to: (1) recognize unrecorded accrued revenues and expenses or (2) allocate recorded deferred revenues and expenses to the appropriate accounting period.

Unearned Revenue Unearned revenue is revenue received before it is actually earned. Examples include cash received in advance for rental properties, for season tickets to various events, for insurance premiums, and for work to be performed in the future. Because the business has an obligation to deliver the merchandise or perform the service for which it has already received payment, unearned revenue represents a current liability for the business. Boyce Real Estate rents space in its building to a tax accountant. On November 1 the accountant paid Boyce $1,200 in advance for rent covering the months of November through April. The entry to record this transaction is shown below. GENERAL JOURNAL DATE 1 2

20-Nov.

3 4

DESCRIPTION

POST. REF.

PAGE DEBIT

AS YOU

READ

Key Point Unearned Revenue Revenue received in advance is usually recorded in a liability account. That account must be adjusted at the end of the fiscal period to recognize the amount of revenue earned during the period.

55

CREDIT 1

1 Cash in Bank Unearned Rental Income Receipt 181

1 2 0 0 00

2

1 2 0 0 00

3 4

As the business delivers the merchandise or performs the service, it earns a part of the advance payment. The earned portion must be transferred from the liability account to a revenue account through an adjusting entry made at the end of the period. When Boyce’s fiscal period ends on December 31, the company will have earned rental income of $400 for two of the six months paid in advance ($1,200
1
3). The adjusting entry to record the rental income is shown below.

GENERAL JOURNAL DATE 1 2

20-Dec.

3

DESCRIPTION

Adjusting Entries 31 Unearned Rental Income Rental Income

4

POST. REF.

PAGE DEBIT

65

CREDIT 1

4 0 0 00

2

4 0 0 00

3 4

Prepaid Expenses A prepaid expense is an expense paid in advance. Examples include the purchase of office supplies, premiums paid on insurance policies, rent paid in advance on the use of property or equipment, and bank discounts on non-interest-bearing notes payable. Examples of adjustments for prepaid expenses appear in Chapter 18 of this textbook.

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–31

A–31

9/15/05 2:39:04 PM

Reversing Entries What Are Reversing Entries? After the financial statements have been prepared and the books are closed, many accountants find it helpful to reverse some of the adjusting entries before starting to record routine transactions for the new accounting period. A reversing entry is an optional general journal entry that is the exact opposite of a specific adjusting entry. Reversing entries are made on the first day of the new accounting period and simplify the recordkeeping in the new period. We will use the note receivable accrual on page A–27 to see how reversing entries work. But first, we will review it without using reversing entries. The adjusting entry recorded accrued revenue of $32.05 in 2010 as a debit to Interest Receivable and a credit to Interest Income: Interest Receivable Debit  Adj. 32.05

Interest Income

Credit 

Credit  Adj. 32.05

Debit 

Refer to the general journal entry on page A–28. When Janie paid the note on March 5, 2011, the total amount of interest received was $110.96. Since the interest owed was received, the accountant credited Interest Receivable for $32.05. The remaining interest of $78.91 ($110.96  $32.05) was recorded as interest income. Notice that the accountant had to allocate the total interest to Interest Receivable and Interest Income based on the adjusting entry made in the prior period. These two accounts appear as follows after posting: Interest Receivable Debit  Adj. 32.05 Bal. 0

Interest Income

Credit  3/5 32.05

Credit  3/5 78.91 Bal. 78.91

Debit 

Now let’s use a reversing entry instead. The adjusting entry is recorded the same way whether reversing entries are used or not: GENERAL JOURNAL DATE 1 2 3

DESCRIPTION

Adjusting Entries 2010 Dec. 31 Interest Receivable Interest Income

4

POST. REF.

PAGE DEBIT

18

CREDIT 1

3 2 05

2

3 2 05

3 4

The accountant records the following reversing entry on January 1, 2011. Note that it is the exact opposite of the December 31 adjusting entry.

A–32

Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–32

9/15/05 2:39:16 PM

GENERAL JOURNAL DATE 1 2 3

DESCRIPTION

POST. REF.

1

PAGE DEBIT

Reversing Entries 2011 Jan. 1 Interest Income Interest Receivable

CREDIT 1

3 2 05

2

3 2 05

3

The accountant writes the words Reversing Entries in the Description column of the General Journal before recording the first reversing entry. This heading eliminates the need for an explanation to be written after each reversing entry. The date of each reversing entry is the first day of the new accounting period. After recording reversing entries, the accountant posts them to the general ledger accounts. The Interest Income account is a temporary account that is closed at the end of each accounting period. It begins the new period with a zero balance. After the reversing entry is posted in the new period, Interest Income has a $32.05 debit balance. This is not the normal balance for this account. As you recall, income accounts have a normal credit balance. Here are the accounts after the reversing entry is posted: Interest Income Debit  Rev. 32.05 Bal. 32.05

Interest Receivable

Credit 

Credit  Rev. 32.05

Debit  Adj. 32.05 Bal. 0

When the note is paid, the accountant records it in the normal manner: GENERAL JOURNAL DATE 1 2

2011 Mar.

3 4 5

POST. REF.

DESCRIPTION

PAGE DEBIT

7

CREDIT 1

5 Cash in Bank Notes Receivable Interest Income Receipt 416

5 1 1 0 96

2

5 0 0 0 00 1 1 0 96

3 4 5

Notice that the accountant does not need to allocate the interest between the receivable and income accounts based on the adjusting entry. Instead, all interest is credited to Interest Income. Here is Interest Income after posting: Interest Income Debit  Rev. 32.05

Credit  3/5 110.96 Bal. 78.91

The Interest Income account balance is $78.91, the same as it would have been if reversing entries had not been used. The reversing entry simplifies the entry made in the new period to record the note’s interest. Reversing entries save time and help prevent errors in the new period. Appendix D The Accrual Basis of Accounting

A26-A35_AppD_868829.indd A–33

A–33

9/15/05 2:39:17 PM

Problems

A PP EN D I X D

Problem D–1 Identifying Accruals and Deferrals Instructions Use the form in your working papers that is similar to the one below. For each item listed below, indicate by placing a check mark in the correct column whether the item is a prepaid expense, unearned revenue, an accrued expense, or accrued revenue. The first item has been completed as an example. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Rent received in advance for a two-year rental of a computer. A two-year premium paid on a fire insurance policy. Advance tuition collected by a university. Interest on an interest-bearing note payable due next year. Cash received for a three-year subscription to a magazine. Fees due for the completed designs for three of five buildings. Property taxes incurred for the last three months of the fiscal period. Salaries owed but not yet paid. Interest on an interest-bearing note receivable that matures in the next accounting period. 10. Office supplies purchased. 11. Cash received for season tickets for home football games.

Item 1.

Prepaid Expense

Unearned Revenue

Accrued Expense

Accrued Revenue

✓

Problem D–2 Recording Adjusting Entries The Gore Paper Company uses the accrual basis of accounting. Its fiscal period ends on June 30. The following account balances appear in the company’s general ledger as of year-end. Cash in Bank $34,616 Interest Receivable 0 Office Supplies 8,335 Salaries Payable 0 Unearned Rental Income 1,000

A–34

Office Supplies Expense $0 Salaries Expense 75,000 Rental Income 0 Interest Income 0

Appendix D Problems

A26-A35_AppD_868829.indd A–34

9/15/05 2:39:19 PM

Problems

APPE NDIX D

Instructions Record the adjusting entries on general journal page 14 in your working papers. 1. The office supplies on hand as of June 30 are valued at $935. 2. Gore’s 5-day weekly payroll totals $1,500. Salaries have been earned but not yet paid or recorded for June 28–30. 3. On June 30, 30 days of interest had accrued on an $8,000, 90-day, 9% note receivable from a charge customer. 4. Of the $1,000 recorded in the Unearned Rental Revenue account, $250 had been earned as of June 30.

Problem D–3 Recording Transactions for Notes Payable The Villareal Corporation uses the accrual basis of accounting. Its fiscal period ends on December 31. On November 15, the Villareal Corporation borrowed $9,500 from the Second National Bank by issuing a 120-day, 9.5% interest-bearing note payable.

Instructions Record the following transactions on general journal page 41. 1. The issuance of the note payable (Note 7). 2. The adjusting entry to record the amount of accrued interest payable at year-end. 3. The payment of the note on the maturity date (Check 411).

Problem D–4 Recording Accrued Expenses The Cassenada Dance Company uses the accrual basis of accounting. Located in Seattle, Washington, the company’s fiscal year-end is July 31. Property taxes are paid in June and December. Total annual property taxes on the studio and parking lot are $12,000.

Instructions 1. Record the payment made on June 30 for the first six months’ property tax in the general journal, page 22. 2. Record the adjusting entry necessary at the fiscal year-end, July 31.

Appendix D Problems

A26-A35_AppD_868829.indd A–35

A–35

4/6/06 6:54:46 PM

APPENDIX E

BEFORE YOU

READ

Main Idea

Federal Personal Income Tax In order to become an informed and contributing member of society, every individual should have a basic knowledge of the federal income tax system. For the system to work fairly and efficiently, everyone must pay their fair share in an accurate and timely manner.

Every income-earning individual must file an income tax return to report taxable income and to calculate income tax owed.

Creation of the Federal Income Tax System

Read to Learn…

At its founding in 1776, this country did not have a federal personal income tax system. Individual states taxed their residents to raise revenue for needed expenditures. The first personal income tax was created in 1862 to finance the Civil War. A commission levied taxes on a small percentage of people to generate needed revenue. However, this tax was abolished in 1872, soon after the war ended. A federal personal income tax was again proposed in 1895 but was declared unconstitutional. In 1913 Congress ratified the 16th Amendment to the Constitution allowing the federal government to levy a tax on individuals based on personal income. The income tax system was established under the principle of voluntary compliance . This means that all individual taxpayers are responsible for filing their tax return. All taxpayers must report their taxable income, accurately calculate the income tax owed, and file the necessary forms on time. The Internal Revenue Service (IRS) also has responsibilities under our present tax system. The IRS must administer the tax laws fairly and process tax returns in an efficient manner.

➤ how the federal tax

system was created. (p. A–36) ➤ the purpose of some common federal tax forms.(p. A–36) ➤ how a federal income tax return is prepared. (p. A–37) ➤ how to file a return online. (p. A–38)

Key Terms voluntary compliance Form W-4 Form 1099 Form 1040EZ adjusted gross income taxable income e-file

How Was the Federal Tax System Created?

Tax Forms and Procedures What Are Three Common Tax-Related Forms? For the federal tax system to run efficiently, all income-earning individuals must prepare and file certain tax forms. For personal income tax, the earning period is from January 1 through December 31. Every individual has from January 1 until April 15 each year to file a tax return and pay the government any taxes owed on income earned in the previous year. For most taxpayers the most common and largest form of income is the gross earnings paid to them by employers. Other common forms of taxable income include interest earned on savings accounts and investments, stock dividends, rental income, and profits from business operations run as sole proprietorships or partnerships.

A–36

Appendix E Federal Personal Income Tax

A36-A41_AppE_868829.indd A–36

4/17/06 6:59:29 AM

Federal Withholding Tax Estimation As you have learned, the employer withholds a certain amount from each employee’s paycheck for taxes. This system of “pay as you earn” was enacted during the early 1940s. Since the exact amount earned for the year will not be determined until the end of December, the amount of taxes withheld from each employee’s paycheck is an estimate of the amount the employee will owe at the end of the year. As you learned in Chapter 12, all employees fill out a Form W-4 when they begin work. This indicates to the employer how much to withhold for federal income tax from each paycheck. For more information on completing Form W-4, refer back to Chapter 12, pages 315–316.

Earned Income Individual taxpayers receive two common federal forms to report income for the year. The first is Form W-2. This form is prepared by employers and reports to employees and the federal government the total gross wages for the year and the amount withheld from employees’ wages to pay the federal income tax. This form is given to the employees in the month of January so the information is available for employees to complete their individual tax returns. To review the Form W-2, refer to Chapter 13, page 358.

Interest Income The other common form used to report income is Form 1099 . This form reports interest earned in savings accounts and is prepared by banks or other institutions. Interest from all 1099 forms is added together and the total interest earned for the year is reported on your federal tax return.

The Federal Income Tax Return What Tax Form Do Most Students File? The most common tax return prepared by students is Form 1040EZ.

Preparing Form 1040EZ

AS YOU

READ

Key Point

To file Form 1040EZ , several requirements must be met including: 1. Taxable income from wages and tips must be less than $100,000. 2. Taxable interest cannot be more than $1,500. A completed Form 1040EZ is presented in Figure E–1 on pages A–39 and A–40. To complete this form, follow these steps:

Completing Your Tax Form You must receive all of your W-2 and 1099 forms before you complete your tax return.

1. Enter your name, address, and social security number. 2. Check the box on the next line if you want $3 to go to the Presidential Election Campaign Fund. 3. Add the amount(s) in box 1 of your Form(s) W-2 and put that amount on line 1 of the form. This should be the total gross earnings from all of your jobs this year. 4. Add the total interest received, as reported on Form(s) 1099, and enter the total amount of interest on line 2. 5. Add lines 1 and 2 and put the total on line 4. This is your total income for the year, called adjusted gross income . Appendix E Federal Personal Income Tax

A36-A41_AppE_868829.indd A–37

A–37

4/17/06 6:59:34 AM

6. Since you are a student, you are probably claimed as a dependent by your parents or guardians. On line 5, check YES. 7. Go to the worksheet for dependents on the back of the form and complete A through G. Enter the amount from G on line 5 on the front of the form. 8. Subtract line 5 from line 4 and enter the amount on line 6. This is your taxable income , the amount of income that is taxed. 9. Add the amounts in box 2 of your Form(s) W-2 and enter the amount on line 7. This is the amount already deducted from your wages to pay your federal tax liability. 10. Enter the amount from line 7 on line 9. 11. Take the amount entered on line 6, and look up the amount of your actual tax liability on the tax table in your working papers. Enter this amount on line 10. 12. If line 9 is greater than line 10, then you have paid in more than you owe and are entitled to a refund. Enter the amount of the overpayment on line 11a. 13. If line 10 is greater than line 9, then you owe the federal government more money. Enter the amount you owe on line 12. If you owe additional money, you must include a check for the entire amount when you file the tax return. Sign the return and enter the date and your occupation on the designated lines. Before your file your tax return, Form 1040EZ, make sure you: 1. Check all calculations. 2. Attach Copy B (one copy) of each of your W-2s, which are supplied to you by your employer(s). 3. File the return by April 15.

Filing a Tax Return Electronically How Do I File My Return Online? Most taxpayers are eligible to file their tax returns online. The Internal Revenue Service (IRS) offers the e-file option as a quick, easy, and accurate way to file tax returns. Detailed information about e-file is available on the IRS Web site. Paid income tax preparers can use e-file if they are an Authorized IRS e-file Provider. If you prepare your own tax return, you can use e-file with a personal computer connected to the Internet. In most states, you can also file your state return at the same time. You have several options to prepare and e-file your own tax return: • • •

purchase commercially available software, download software from an Internet site, or prepare and file your return online.

The IRS does not provide e-file software or offer online filing. A number of companies, tested and approved by the IRS, offer it. Some charge a fee and others do not. The IRS Web site provides additional information. Like any product or service, you must shop around and choose the product that is right for you. A–38

Appendix E Federal Personal Income Tax

A36-A41_AppE_868829.indd A–38

4/17/06 6:59:36 AM

After you transmit your return, you are notified whether it has been accepted or rejected. If it is not accepted, you are provided with customer support to correct the return and resubmit it. If you owe money, you can authorize an electronic funds withdrawal from your bank account or use a credit card. If you are due to receive a refund,

Department of the Treasury—Internal Revenue Service Form

˜Vœ“iÊ/>ÝÊ,iÌÕÀ˜ÊvœÀÊ-ˆ˜}iÊ>˜` œˆ˜ÌʈiÀÃÊ7ˆÌ…Ê œÊ i«i˜`i˜Ìà ­™™®

£ä{ä < >Li ­-iiÊ«>}iÊ££°® 1ÃiÊ̅iÊ,>Li° "̅iÀ܈Ãi] «i>ÃiÊ«Àˆ˜Ì œÀÊÌÞ«i°

9œÕÀÊvˆÀÃÌʘ>“iÊ>˜`ʈ˜ˆÌˆ>

œ>˜Ê°






vÊ>ʍœˆ˜ÌÊÀiÌÕÀ˜]ÊëœÕÃi½ÃÊvˆÀÃÌʘ>“iÊ>˜`ʈ˜ˆÌˆ>


ÌÌ>V… œÀ“­Ã®Ê7‡Ó …iÀi°

˜VœÃi]ÊLÕÌ `œÊ˜œÌÊ>ÌÌ>V…] >˜ÞÊ«>ޓi˜Ì°

œÌi° 9œÕ “ÕÃÌ V…iVŽ 9iÃʜÀÊ œ°

*>ޓi˜Ìà >˜`ÊÌ>Ý

OMB No. 1545-0675 9œÕÀÊÜVˆ>ÊÃiVÕÀˆÌÞʘՓLiÀ

ÕÃÌiœÃ

äΣÊÊÊ88ÊÊÊ8888 -«œÕÃi½ÃÊÜVˆ>ÊÃiVÕÀˆÌÞʘՓLiÀ

>ÃÌʘ>“i

œ“iÊ>``ÀiÃÃÊ­˜Õ“LiÀÊ>˜`ÊÃÌÀiiÌ®°ÊvÊޜÕʅ>ÛiÊ>Ê*°"°ÊLœÝ]ÊÃiiÊ«>}iÊ££°


«Ì°Ê˜œ°

“«œÀÌ>˜Ìt

n{Ê “Ê-ÌÀiiÌ



,

9œÕʓÕÃÌ i˜ÌiÀÊޜÕÀ -- ­Ã®Ê>LœÛi°

ˆÌÞ]Ê̜ܘʜÀÊ«œÃÌʜvvˆVi]ÊÃÌ>Ìi]Ê>˜`Ê<*ÊVœ`i°ÊvÊޜÕʅ>ÛiÊ>ÊvœÀiˆ}˜Ê>``ÀiÃÃ]ÊÃiiÊ«>}iÊ££°

œÀÜ>Ž]Ê6
ÊÊÓÎx£{

Presidential Election Campaign (page 11)

˜Vœ“i

Óäqq

>ÃÌʘ>“i

You

Note. Checking “Yes” will not change your tax or reduce your refund. Do you, or your spouse if a joint return, want $3 to go to this fund? 1

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2. Attach your Form(s) W-2.

1

2

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

2

3

Unemployment compensation and Alaska Permanent Fund dividends (see page 13).

3

4

Add lines 1, 2, and 3. This is your adjusted gross income.

4

5

Can your parents (or someone else) claim you on their return? Yes. Enter amount from No. If single, enter $7,950. If married filing jointly, enter $15,900. m worksheet on back. See back for explanation.

5

6

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-. This is your taxable income.

6

Federal income tax withheld from box 2 of your Form(s) W-2.

7

7

8a Earned income credit (EIC).

10

,iv՘`

Add lines 7 and 8a. These are your total payments. Tax. Use the amount on line 6 above to find your tax in the tax table on pages 24–32 of the booklet. Then, enter the tax from the table on this line.


“œÕ˜Ì ޜÕʜÜi

12

/…ˆÀ`Ê«>ÀÌÞ `iÈ}˜ii

œÊޜÕÊÜ>˜ÌÊ̜Ê>œÜÊ>˜œÌ…iÀÊ«iÀܘÊ̜Ê`ˆÃVÕÃÃÊ̅ˆÃÊÀiÌÕÀ˜Ê܈̅Ê̅iÊ,-Ê­ÃiiÊ«>}iÊ£™®¶

*>ˆ` «Ài«>ÀiÀ½Ã ÕÃiʜ˜Þ

No

È£Ó£ÊÊää {nxäÊÊää £ÓÇ£ÊÊää Óä{ÊÊää

b Routing number

Óä{ÊÊää

9

11a If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund.

œˆ˜ÌÊÀiÌÕÀ˜¶ -iiÊ«>}iÊ££° ii«Ê>ÊVœ«Þ vœÀÊޜÕÀ ÀiVœÀ`ð

Yes

x™x{ÊÊää £ÈÇÊÊää

8b

>ÛiʈÌÊ`ˆÀiVÌÞ `i«œÃˆÌi`tÊ-ii «>}iÊ£nÊ>˜`Êvˆ ˆ˜Ê££L]Ê££V] >˜`Ê££`°

-ˆ}˜ …iÀi

No

8a

b Nontaxable combat pay election. 9

Spouse

mYes

c Type:

£ÓÈÊÊää ÇnÊÊää

10 11a

Checking

Savings

d Account number If line 10 is larger than line 9, subtract line 9 from line 10. This is the amount you owe. For details on how to pay, see page 19.

12 9i𠜓«iÌiÊ̅iÊvœœÜˆ˜}°

œ

iÈ}˜ii½Ã *…œ˜i *iÀܘ>Êˆ`i˜ÌˆvˆV>̈œ˜ ­ ® ˜>“i ˜œ° ˜Õ“LiÀÊ­* ® 1˜`iÀÊ«i˜>ÌˆiÃʜvÊ«iÀÕÀÞ]ÊÊ`iV>ÀiÊ̅>ÌÊʅ>ÛiÊiÝ>“ˆ˜i`Ê̅ˆÃÊÀiÌÕÀ˜]Ê>˜`Ê̜Ê̅iÊLiÃÌʜvʓÞʎ˜œÜi`}iÊ>˜`ÊLiˆiv]ʈÌʈÃÊÌÀÕi]ÊVœÀÀiVÌ]Ê>˜` >VVÕÀ>ÌiÞʏˆÃÌÃÊ>Ê>“œÕ˜ÌÃÊ>˜`ÊÜÕÀViÃʜvʈ˜Vœ“iÊÊÀiViˆÛi`Ê`ÕÀˆ˜}Ê̅iÊÌ>ÝÊÞi>À°Ê iV>À>̈œ˜ÊœvÊ«Ài«>ÀiÀÊ­œÌ…iÀÊ̅>˜Ê̅iÊÌ>Ý«>ÞiÀ®ÊˆÃÊL>Ãi` œ˜Ê>Êˆ˜vœÀ“>̈œ˜ÊœvÊ܅ˆV…Ê̅iÊ«Ài«>ÀiÀʅ>ÃÊ>˜Þʎ˜œÜi`}i° >Þ̈“iÊ«…œ˜iʘՓLiÀ 9œÕÀʜVVÕ«>̈œ˜ 9œÕÀÊÈ}˜>ÌÕÀi >Ìi

ƄPǑͮ
ƄżӅґUȢMΕT

-«œÕÃi½ÃÊÈ}˜>ÌÕÀi°ÊvÊ>ʍœˆ˜ÌÊÀiÌÕÀ˜]ÊLœÌ… “ÕÃÌÊÈ}˜°

ÎÉ£™ÉÓäqq >Ìi

*Ài«>ÀiÀ½Ã È}˜>ÌÕÀi ˆÀ“½Ãʘ>“iÊ­œÀ ޜÕÀÃʈvÊÃiv‡i“«œÞi`®] >``ÀiÃÃ]Ê>˜`Ê<*ÊVœ`i

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 23.

ViÀŽ

­

® £ÓÎÊxxxqÓäää

-«œÕÃi½ÃʜVVÕ«>̈œ˜ >Ìi

…iVŽÊˆv Ãiv‡i“«œÞi`

*Ài«>ÀiÀ½ÃÊ-- ʜÀÊ*/

 *…œ˜iʘœ° Cat. No. 11329W

­

® œÀ“

£ä{ä <

­Óäq q®

Figure E–1 Completed Form 1040EZ Appendix E Federal Personal Income Tax

A36-A41_AppE_868829.indd A–39

A–39

4/17/06 6:59:36 AM

it can be deposited directly into your bank account. Refunds are received much faster using this system compared to mailing your tax return. The IRS also offers a service called Tele-Tax. You can call the IRS 24 hours a day and hear recorded messages on over 150 common tax topics. These topics can also be accessed on the IRS Web site.

*>}i

œÀ“Ê£ä{ä <Ê­Óäq q®

Ó

1Ãi ̅ˆÃ vœÀ“ʈv

3 Your filing status is single or married filing jointly. If you are not sure about your filing status, see page 11. 3 You (and your spouse if married filing jointly) were under age 65 and not blind at the end of 20– –. If you were born on January 1, 19– –, you are considered to be age 65 at the end of 20––. 3 You do not claim any dependents. For information on dependents, use TeleTax topic 354 (see page 6). 3 Your taxable income (line 6) is less than $100,000. 3 You do not claim any adjustments to income. For information on adjustments to income, use TeleTax topics 451-458 (see page 6). 3 The only tax credit you can claim is the earned income credit. For information on credits, use TeleTax topics 601-608 and 610 (see page 6). 3 You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500. But if you earned tips, including allocated tips, that are not included in box 5 and box 7 of your Form W-2, you may not be able to use Form 1040EZ (see page 12). If you are planning to use Form 1040EZ for a child who received Alaska Permanent Fund dividends, see page 13. 3 You did not receive any advance earned income credit payments. If you cannot use this form, use TeleTax topic 352 (see page 6).

ˆˆ˜}ʈ˜ ޜÕÀ ÀiÌÕÀ˜

If you received a scholarship or fellowship grant or tax-exempt interest income, such as on municipal bonds, see the booklet before filling in the form. Also, see the booklet if you received a Form 1099-INT showing federal income tax withheld or if federal income tax was withheld from your unemployment compensation or Alaska Permanent Fund dividends. Remember, you must report all wages, salaries, and tips even if you do not get a Form W-2 from your employer. You must also report all your taxable interest, including interest from banks, savings and loans, credit unions, etc., even if you do not get a Form 1099-INT.

For tips on how to avoid common mistakes, see page 20.

7œÀŽÃ…iiÌ vœÀ `i«i˜`i˜Ìà ܅œ V…iVŽi` º9iû œ˜ ˆ˜iÊx (keep a copy for your records)

Use this worksheet to figure the amount to enter on line 5 if someone can claim you (or your spouse if married filing jointly) as a dependent, even if that person chooses not to do so. To find out if someone can claim you as a dependent, use TeleTax topic 354 (see page 6). x]™x{°ää A . Amount, if any, from line 1 on front ÈÓä{°ää + 250.00 Enter total A. 800.00 B. B . Minimum standard deduction ÈÓä{°ää C. C. Enter the larger of line A or line B here D . Maximum standard deduction. If single, enter $4,850; if married {nxä°ää D. filing jointly, enter $9,700 E . Enter the smaller of line C or line D here. This is your standard {nxä°ää E. deduction F. Exemption amount. 3 If single, enter -0-. qäq F. 3 If married filing jointly and—

—both you and your spouse can be claimed as dependents, enter -0-. —only one of you can be claimed as a dependent, enter $3,100. {nxä°ää G . Add lines E and F. Enter the total here and on line 5 on the front G. If you checked “No” on line 5 because no one can claim you (or your spouse if married filing jointly) as a dependent, enter on line 5 the amount shown below that applies to you. 3 Single, enter $7,950. This is the total of your standard deduction ($4,850) and your exemption ($3,100). 3 Married filing jointly, enter $15,900. This is the total of your standard deduction ($9,700), your exemption ($3,100), and your spouse’s exemption ($3,100).

>ˆˆ˜} ÀiÌÕÀ˜

Mail your return by April 15, 20– –. Use the envelope that came with your booklet. If you do not have that envelope or if you moved during the year, see the back cover for the address to use. œÀ“

£ä{ä <

­Óäq q®

Figure E–1 Completed Form 1040EZ (continued) A–40

Appendix E Federal Personal Income Tax

A36-A41_AppE_868829.indd A–40

4/17/06 6:59:40 AM

APPE NDIX E

Problems Problem E–1 Preparing Form 1040EZ Michael Feld is a junior at Lewiston High School. He lives with his parents at 274 West Polomia Drive in Hanksville, Ohio, 03856. Mike’s social security number is 036-23-8825. Mike wants to contribute $3 to the Presidential Election Campaign Fund. Mike worked full-time last summer at Harriet’s Sub Shop as a counter clerk. He received a Form W-2, which stated that he had total gross wages of $6,201.00 and $192.00 was deducted for federal income tax. Mike also had a savings account. The Kingsman National Bank sent him Form 1099, which stated he had earned interest of $113.00 on his account. Mike lives at home with his parents and is claimed as a dependent on their tax return.

Instructions Using this information, prepare Form 1040EZ for Mike Feld. A blank Form 1040EZ is provided in your working papers. Use the tax chart in your working papers to calculate the federal income tax.

Problem E–2 Preparing Form 1040EZ Alicia DeSantis is a senior at Georgetown High School. She lives at 825 Patterson Street in Montville, Texas, 09436. Her social security number is 043-73-8217. She worked part-time during the school year at Hilltop Deli and full-time during the summer as a lifeguard and swimming instructor at Montville’s town pool. Alicia wants to contribute $3 to the Presidential Election Campaign Fund. Alicia lives with her mother and is claimed as a dependent on her mother’s tax return. Her Form W-2 from the deli reported that she earned $2,143.60 during the year and $112.00 was deducted for federal income tax. The town of Montville sent her a W-2 that reported she earned $4,815.00 during the summer and $206.00 was deducted for federal income tax. Alicia opened a savings account at the local bank that sent her a Form 1099 that stated she earned $118.50 in interest last year. She also had another savings account set up for college that paid her $201.70 in interest.

Instructions Prepare Form 1040EZ for Alicia. A blank Form 1040EZ is provided in your working papers. Use the tax charts in your working papers to calculate the tax owed.

Appendix E Problems

A36-A41_AppE_868829.indd A–41

A–41

4/17/06 6:59:43 AM

APPENDIX F

Building a Powerful Brand Excerpts from the PETsMART, Inc. 2003 Annual Report

Intended for Use in Chapters 14–26, 29 In this appendix, we present excerpts from the 2003 Annual Report of PETsMART, a publicly held corporation. These excerpts were selected to illustrate many of the concepts discussed in this textbook. Not all of the terminology and policies appearing in this report are consistent with our text discussions. This illustrates some of the diversity that exists in financial reporting. For the complete annual report, visit the PETsMART Web site.

April 26, 2004 Dear Fellow Stockholders: In 2003, we made strides in our quest to drive strong, sustainable results, and we set the foundation for the next phase of our evolution— building a powerful brand. For the year, PETsMART earned $0.95 per share, compared to $0.63 per share in 2002. Topline sales grew 11.2 percent year over year, and comparable store sales increased 7.0 percent. Our pet services business continued to surpass expectations, growing at 25.4 percent for the year. And, we generated $246.4 million in cash from operations, further strengthening our balance sheet and our ability to finance new growth initiatives. We ended the year with 60 net new stores, giving us a presence in nearly all of North America’s top 60 markets. In 2004, we will open 90 net new stores, adding up to annual square footage growth of about 12 percent.

and further differentiating PETsMART from the competition. The format is flexible and gives us the ability to easily adapt to an ever-changing marketplace. In 2004, we’re building on that format. By the fourth quarter, each of our stores will have new in-store signage that’s designed to improve our communications with customers.

We completed reformats of virtually every store in the chain, changing the shopping experience in ways that matter to our customer, driving returns

“Once pet parents discover our services, they do not leave us.”

A–42

Appendix F

A42-A51-APPF-868829.indd 42

9/19/05 6:26:05 PM

And, we’re testing other in-store enhancements to make our stores easier to shop and to build longterm relationships with our customers. Pet services continue to be an engine of profitable growth and give us the opportunity to create and enhance our relationships with our customers. And, once pet parents discover our services, they do not leave us. Our pet services are three times more profitable than the core store and have consistently grown at or above our target of 20 percent. We expect these growth rates to continue for at least the next two years. Our customers trust us, and by providing high-quality grooming and training services, we’ve earned the right to move into new service adjacencies. During the year, we expanded the test of the PETsMART PETsHOTELSM, a unique boarding and day care concept. We opened six additional locations inside our larger PETsMART stores and incorporated one hotel into the construction of a new store. Based on the results of our small initial test, we believe the PETsHOTEL concept is working and we’re expanding the test to an additional 14 or so hotels in 2004.

“When it comes to customer relationships, our associates are our most powerful asset.” When it comes to customer relationships, our associates are our most powerful asset. That’s why we’re continuing to make investments in associate education. We’ve enhanced our hiring and training programs to bring in and keep the highest quality candidates in our stores. In 2004 and beyond, we’re dedicated to ensuring our associates have the tools they need to provide our customers with superior service and solutions. Over the next two years, we’ll rollout a customer relationship marketing program to better meet our customers’ unique needs. These concepts have the potential to increase business and reinforce PETsMART’s position as the destination for the Total Lifetime Care for pets. In addition to all we’ve accomplished and all that’s ahead, I’d like to point out the lives saved through PETsMART Charities® Adoption Centers. Taking care of pets is who we are and we’re committed to making a difference in the communities we serve. In 2003, more than 311,000 homeless pets found families through our in-store adoption centers—and I’m very proud of that. Our accomplishments in 2003 were many, and we’re bullish about PETsMART’s ability to build long-term relationships with our customers— relationships that translate into continued profitability and returns for our shareholders.

Sincerely,

Philip L. Francis Chairman and Chief Executive Officer

Appendix F

A42-A51-APPF-868829.indd 43

A–43

9/19/05 6:26:32 PM

Statement of Corporate Responsibility The management of PETsMART is dedicated to ensuring our high standards of corporate governance are maintained, including compliance with our established financial accounting policies and for reporting our results with objectivity and the highest degree of integrity. The culture at PETsMART demands integrity and we have the highest confidence in our people and our underlying systems of internal controls. Management fully embraces and understands its responsibility for the integrity and accuracy of our financial statements. Here we share a few of the various aspects of our corporate governance: • Our Board of Directors has adopted and posted on our Web site our Corporate Governance Guidelines and related information.

• PETsMART has a clear code of business ethics and policies. • PETsMART has complaint procedures in place for both associates and others. • The internal audit department of PETsMART reviews key areas of our business and financial processes and controls, and reports directly to the Audit Committee. We are committed to improving stockholder value and fully understand and embrace our oversight responsibilities. It is a PETsMART tenet that investors and other users of our financial statements have confidence the financial information we provide is timely, complete, relevant, fair, and accurate. We will continue to strive to strengthen your confidence by our actions.

• Eight of the nine members of the Board of Directors are independent of PETsMART and our management. • The Lead Director and all members of the board committees—the Audit Committee, the Compensation Committee, and the Corporate Governance Committee—are independent. • The independent board members regularly meet without management present.

Philip L. Francis Chairman and Chief Executive Officer

Timothy E. Kullman Senior Vice President, Chief Financial Officer

• The charters for these board committees clearly establish committee member roles and responsibilities.

A–44

Appendix F

A42-A51-APPF-868829.indd 44

9/19/05 6:26:43 PM

Management’s Discussion and Analysis of Financial Condition and Results of Operations Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could materially differ from those discussed here. Overview Based on our 2003 sales of $3.0 billion, we are the leading provider of products, services, and solutions for the lifetime needs of pets in North America. As of February 1, 2004, we operated 643 retail stores in North America, typically ranging in size from 19,000 to 27,000 square feet. We also reach customers through our direct marketing channels, including PETsMART.com, the internet’s most popular pet e-commerce site, a separate web-site dedicated to equine products, and two major branded catalogs. We complement our extensive product assortment with a wide selection of value-added pet services, including grooming and pet training. Virtually all our stores offer complete pet training services and feature pet styling salons that provide high quality grooming services. In addition, through our strategic relationship with Banfield, The Pet Hospital, fullservice veterinary care is available in approximately 350 of our stores. During 2003, we opened 60 net new stores, and remodeled the final group of approximately 145 stores under a new store format. The new store format eliminates most of the high-steel shelving, organizes consumable and hard good products by pet species, and also places a stronger visual emphasis on in-store services like pet training, grooming, adoptions, and veterinary care. We continue to invest in training for our approximately 26,500 associates as part of our ongoing cultural shift with an emphasis on customer service and providing pet solutions. In 2004, we expect to open approximately 90 new stores, net of store closures. Fiscal 2003 Compared to Fiscal 2002 Net Sales Net sales increased $300.9 million, or 11.2%, to $2,996.1 million for 2003, from 2002 sales of $2,695.2 million. Store sales increased by $310.6 million as a result of 60 additional net new stores and a 7.0% increase in comparable store sales. Included in store sale, services sales increased by 25.4%, or $39.2 million. The increase in services revenue, which includes grooming, training, and PETsHOTEL operations, was due primarily to higher volume. The increases were partially offset by a decrease in direct marketing channel sales of $9.7 million. As of February 1, 2004, we operated 643 stores, compared with 583 stores as of February 2, 2003. Gross Profit Gross profit increased as a percentage of net sales to 30.4% for 2003, from 29.2% for 2002. The increase primarily reflected lower product cost of goods sold and increased sales of higher margin products during 2003, compared with 2002. We also continued to leverage expenses in 2003 through lower inventory shrinkage and occupancy costs as a percentage of sales, compared with 2002. Appendix F

A42-A51-APPF-868829.indd 45

A–45

9/19/05 6:26:45 PM

PETsMART, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 1, February 2, 2004 2003 (In thousands, except par value)

ASSETS Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 327,810 16,628 309,140 2,876 31,198

$ 253,936 9,657 257,090 8,809 31,656

Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

687,652 577,182 33,694 47,463 14,422 2,621 13,661

561,148 489,947 33,694 46,061 14,422 2,838 10,746

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,376,695

$1,158,856

LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and bank overdraft ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued payroll, bonus, and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued occupancy expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current maturities of capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 128,303 73,058 27,971 4,964 105,518

$ 102,169 70,256 24,285 7,564 84,190

Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred rents and other noncurrent liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

339,814 165,738 31,988

288,464 159,443 29,750

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

537,540

477,657

Ì

Ì

Commitments and contingencies Stockholders' Equity: Preferred stock; $.0001 par value; 10,000 shares authorized, none issued and outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock; $.0001 par value; 250,000 shares authorized, 144,813 and 139,914 shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: treasury stock, at cost, 1,406 and 0 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

14 705,265 (6,658) 174,053 1,458 (34,977)

14 642,767 (19) 40,239 (1,802) Ì

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

839,155

681,199

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,376,695

$1,158,856

The accompanying notes are an integral part of these consolidated Ñnancial statements. [Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]

uity + Stockholders’ Eq Assets = Liabilities + $839,155 6,695 = $537,540 Feb. 1, 2004: $1,37

A–46

Appendix F

A42-A51-APPF-868829.indd 46

9/19/05 6:26:48 PM

PETsMART, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year Ended February 1, February 2, February 3, 2004 2003 2002 (In thousands, except per share data)

Net salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,996,051 2,086,117

$2,695,184 1,907,144

$2,501,012 1,827,527

Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General and administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

909,934 551,388 114,618

788,040 498,343 117,851

673,485 483,657 119,156

Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

243,928 3,358 (19,454)

171,846 2,803 (20,836)

70,672 2,007 (27,436)

Income before income tax expense, and minority interest ÏÏÏÏÏÏÏÏÏÏ Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

227,832 88,283

153,813 64,958

45,243 7,972

Income before minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest in subsidiary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

139,549 Ì

88,855 Ì

37,271 2,296

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss), net of income tax expense (beneÑt): Foreign currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

139,549

88,855

39,567

3,260

1,003

Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 142,809

$

89,858

$

39,210

Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

0.99

$

0.66

$

0.35

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

0.95

$

0.63

$

0.35

(357)

The accompanying notes are an integral part of these consolidated Ñnancial statements. [Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]

Statement of Operations

• Net sales. Total sales of the com pany minus the value of products discounted or returned. • Cost of sales. Actual cost the bus iness incurred for the merchandise sold and services provided to customers during the accounting period. • Gross profit. Net sales minus cost of sales. • Operating expenses. • General and administrative exp enses. • Operating income. Income earn ed from normal business activities. • Income tax expense. Federal and state income taxes based on the com pany’s taxable income. • Minority interest in subsidiary loss. This refers to the loss from PET sMART.com, which sells PETsMART products through its Web site. In the fiscal year ending Februar y 3, 2002, PETsMART owned less than 100 percent of PET sMART.com’s stock. • Net income. The “bottom line,” or final income after taxes and min ority interest. • Foreign currency translation adju stments. PETsMART has stores that use Canadian currency. This line reports the adjustments to convert Canadian financial stateme nts into U.S. dollars. • Comprehensive income. Compreh ensive income includes items that bus ines ses must disclose but report separately from net inco me. PETsMART’s only comprehens ive income item is the foreign currency translation adjustm ents.

Appendix F

A42-A51-APPF-868829.indd 47

A–47

9/19/05 6:26:48 PM

A–48

Appendix F

A42-A51-APPF-868829.indd 48

9/19/05 6:26:49 PM

BALANCE AT FEBRUARY 3, 2002 ÏÏÏÏÏÏ 112,609 Tax beneÑt from exercise of stock options ÏÏÏ Issuance of common stock under stock incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,037 Issuance of common stock under an oÅering 3,492 Conversion of 63/4% Subordinated Convertible Notes to common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,797 Amortization of deferred compensation, net of award reacquisitions and adjustments ÏÏÏÏÏ (21) Compensation expense related to options held by non-employeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income, net of income tax: Foreign currency translation adjustments ÏÏ Accrued interest on notes receivable issued to oÇcers and notes issued to oÇcers ÏÏÏÏÏÏÏ Repayments of notes receivable issued to oÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

1,164

88,855

1,003

(74)

277

(351)

(717) 5,204 88,855

(717) 5,204

1,003

1,164

27,189 43,925

325,806 14,112

174,732

Ì

174,730

(4,487)

2

(2,805)

27,188 43,925

(48,616)

1

(296)

381,999 14,112

11

Accumulated Retained Other Notes Shares Additional Deferred Earnings/ Comprehensive Receivable Common Treasury Common Paid-In Compen- (Accumulate Income from Treasury Stock Stock Stock Capital sation DeÑcit) (Loss) OÇcers Stock Total Amounts (In thousands, except per share data) BALANCE AT JANUARY 28, 2001 ÏÏÏÏÏÏ 117,753 (6,350) 12 403,758 (663) (88,183) (2,448) (4,319) (27,578) 280,579 Tax beneÑt from exercise of stock options ÏÏÏ 172 172 Issuance of common stock under stock incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,231 5,909 5,909 Amortization of deferred compensation, net of award reacquisitions and adjustments ÏÏÏÏÏ (25) (263) 367 104 Other comprehensive loss, net of income tax: Foreign currency translation adjustments ÏÏ (357) (357) Accrued interest on notes receivable issued to oÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (511) (511) Repayments of notes receivable issued to oÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343 343 Retirement of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,350) 6,350 (1) (27,577) 27,578 Ì Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,567 39,567

CONSOLIDATEDSTATEMENTS STATEMENTS OF OF STOCKHOLDERS’ STOCKHOLDERS' EQUITY CONSOLIDATED EQUITY

PETsMART, INC. AND SUBSIDIARIES

Appendix F

A42-A51-APPF-868829.indd 49

A–49

9/19/05 6:26:50 PM

139,549 $705,265

$(6,658)

$ 1,458

3,260

$

Ì

Ì

681,199 17,743

$(34,977) $839,155

3,260 (34,977) (34,977) 139,549

al and book valu ived from the initi ce This is called the re ny pa m co e its, ds that th accumulated prof It includes procee to the public, plus k oc st of s le sa subsequent rnings. ic stock called retained ea value on the publ k’s oc st e th as e its own t the sam ket determines in ar Book value is no m k oc st e Th e. e of arket valu an the book valu market, called m is worth more th ny ock pa st m ’s co ny e th pa m er ample, a co ways wheth ex r Fo . es ow it t sets and us wha the value of the as what it owns min to rd ga re t ou ith larly w price changes regu . run the company to es us liabilities it

uity pany. Stockholders’ Eq stake in the com e of the owners’

[Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]

The accompanying notes are an integral part of these consolidated Ñnancial statements.

$14

(5,735)

Ì

2,109 (5,735)

(6,639)

(1,802)

8,748

40,239

36,007

(19)

Total

36,007

642,767 17,743

$174,053

(1,406)

14

BALANCE AT FEBRUARY 1, 2004 ÏÏÏÏÏÏ 144,813

(1,406)

Ì

BALANCE AT FEBRUARY 2, 2003 ÏÏÏÏÏÏ 139,914 Tax beneÑt from exercise of stock options ÏÏÏ Issuance of common stock under stock incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,344 Amortization of deferred compensation, net of award reacquisitions and adjustments ÏÏÏÏÏ 555 Cash Dividends ($0.02 per share) ÏÏÏÏÏÏÏÏÏÏ Other comprehensive income, net of income tax: Foreign currency translation adjustments ÏÏ Purchase of treasury stock, at cost ÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Accumulated Retained Other Notes Shares Additional Deferred Earnings/ Comprehensive Receivable Common Treasury Common Paid-In Compen- (Accumulate Income from Treasury Stock Stock Stock Capital sation DeÑcit) (Loss) OÇcers Stock Amounts (In thousands, except per share data)

CONSOLIDATEDSTATEMENTS STATEMENTS OF OF STOCKHOLDERS’ STOCKHOLDERS' EQUITY CONSOLIDATED EQUITY (continued)

PETsMART, INC. AND SUBSIDIARIES

PETsMART, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS February 1, 2004

CASH FLOWS FROM OPERATING ACTIVITIES: Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income to net cash provided by operating activities Ì Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss on disposal of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Elimination of goodwill in PETsMART.comÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impairment charge and write-down of subsidiary assets ÏÏÏÏÏÏ Minority interest in subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital assets received through vendor settlement ÏÏÏÏÏÏÏÏÏÏÏ Gain on early extinguishment of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation expense related to non-employee options ÏÏÏÏÏÏ Tax beneÑt from exercise of stock optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Changes in assets and liabilities: Receivables, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other noncurrent assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued payroll, bonus, and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued occupancy expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred rents and other noncurrent liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment in equity holdings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sales of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Fiscal Year Ended February 2, February 3, 2003 2002 (In thousands)

$ 139,549

$

88,855

$

39,567

95,948 4,655 Ì Ì Ì (1,288) Ì Ì 17,743 4,532

77,268 4,377 Ì Ì Ì (3,442) Ì 1,164 14,112 (15,941)

58,709 5,796 8,575 9,747 (2,296) Ì (1,190) Ì 172 (26,556)

(6,646) (50,504) 1,021 (2,977) 16,400 2,858 3,723 17,305 4,114 246,433

13,654 14,609 (2,250) 1,844 5,299 18,433 (2,584) 7,052 320 222,770

13,525 48,651 (12,134) (242) (37,651) 26,251 6,643 48,397 4,030 189,994

(172,227) Ì 315 (171,912)

(163,698) (9,500) 674 (172,524)

(105,104) (741) 28,481 (77,364)

Statement of Cash Flows

ence between tement explains the differ sta l cia an fin s Thi se. rpo Pu h during the and ending balances of cas g nin gin be s ny’ pa com the accounting period. h and cash h flows includes both cas Definition. The term cas ments with a est inv uid siders any liq con T AR TsM PE . nts ale uiv eq nts. or less to be cash equivale maturity of three months irect method to use either the direct or ind can ies an mp Co d. tho Me ults are the same. erating activities. The res op m fro ws flo h cas ort rep starts with net ct method. This method ire ind the s use T AR TsM PE tion) to arrive at sh items (such as deprecia nca no ts jus ad d an e om inc . ed by operating activities the net cash flows provid h payments from s all cash receipts and cas ort rep d tho me ect dir The operating activities.

A–50

Appendix F

A42-A51-APPF-868829.indd 50

9/19/05 6:26:51 PM

PETsMART, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) February 1, 2004

Fiscal Year Ended February 2, February 3, 2003 2002 (In thousands)

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,007 Net repayments (issuances) of notes receivable from oÇcersÏÏÏÏ Ì Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (34,977) Borrowings from bank credit facilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Repayments of bank credit facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Purchases of subordinated convertible notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Payments on capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,892) Increase (decrease) in bank overdraft ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,716 Payments of deferred Ñnancing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (464) Cash dividends paid to stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,871) Net cash (used in) provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏ (481) EFFECT OF EXCHANGE RATE CHANGES ON CASH ÏÏÏÏÏ (166) INCREASE IN CASH AND CASH EQUIVALENTSÏÏÏÏÏÏÏÏÏ 73,874 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 253,936 CASH AND CASH EQUIVALENTS AT END OF YEARÏÏÏÏÏ $ 327,810 $

71,114 4,487 Ì Ì Ì (275) (12,304) 3,397 Ì Ì 66,419 160 116,825 137,111 253,936

5,909 (168) Ì 171,200 (171,200) (6,382) (12,733) (3,806) (2,280) Ì (19,460) 114 93,284 43,827 $ 137,111

The accompanying notes are an integral part of these consolidated Ñnancial statements. [Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]

ting Activities. Cash Flows from Opera events that are the d Include transactions an operations. result of actual business ing Activities Cash Flows from Invest events that involve d an Include transactions nt assets except plant assets and investme uivalents. those classified as cash eq g Activities Cash Flows from Financin nts that affect eve d an Include transactions olders’ ckh sto d long-term liabilities an equity accounts.

Appendix F

A42-A51-APPF-868829.indd 51

A–51

9/19/05 6:26:52 PM

APPENDIX G

Additional Reinforcement Problems

Complete appendix problems using:

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 3A 1. Select the spreadsheet template for Problem 3A. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Manual Glencoe Spreadsheet Spreadshee OR Templates Working Papers

Chapter 3, Determining the Effects of Problem 3A Business Transactions on the Accounting Equation Pamela Wong started her own business called Thunder Graphics Desktop Publishing.

Instructions Use the form provided in your working papers. For each of the following transactions: 1. Identify the accounts affected. 2. Write the amount of the increase (
) or decrease () in the space provided on the form. 3. Determine the new balance for each account. Trans. No. 1 2 3 4 5 6 7 8 9 10 11

Analyze

A–52

Transactions Pamela Wong, the owner, opened a checking account for the business by depositing $48,000 of her personal funds. Paid the monthly rent of $1,500. Bought office furniture on account for $1,000. Pamela Wong invested $3,000 of office equipment in the business. Paid cash for a new computer for the business, $5,000. Paid for an advertisement in the local newspaper, $200. Completed graphic desktop publishing services for a client and sent a bill for $800. Paid $700 on account for the office furniture bought earlier. Received $500 on account from a client. Pamela Wong withdrew $1,000 for personal use. Received $400 cash for desktop publishing services completed for a client. After analyzing all of the transactions, complete the following tasks. (a) Compute the amount of total equipment assets. (b) Compute the amount of total assets. (c) Compute the total liabilities and owner’s equity. (d) Conclude whether the accounting equation is in balance.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–52

9/17/05 1:30:09 PM

Problems

APPE NDIX G

Chapter 4, Analyzing Transactions Affecting Problem 4A Assets, Liabilities, and Owner’s Equity Thunder Graphics Desktop Publishing had the following transactions. A partial list of the accounts used to record and report business transactions appear below. 101 Cash in Bank 110 Accounts Receivable— Roger McFall 125 Office Equipment 130 Office Furniture 135 Computer Equipment

201 Accounts Payable— Computer Warehouse, Inc. 205 Accounts Payable— Pro Computer Company 301 Pamela Wong, Capital

Instructions On the forms provided in your working papers: 1. Prepare a T account for each account listed above. 2. Analyze and record each of the following business transactions in the appropriate T accounts. Identify each transaction by number. 3. After recording all transactions, compute and record the account balance and identify the normal side of each T account. 4. Add the balances of those accounts with normal debit balances. 5. Add the balances of those accounts with normal credit balances. Trans. No. 1 2 3 4 5 6 7 8 9 10

Analyze

Transactions Pamela Wong invested $30,000 into the business. Invested office equipment, valued at $650, into the business. Bought a computer on account from Computer Warehouse, Inc. for $9,360. Bought new office equipment for $1,550, Check 100. Bought new office furniture on account from Computer Warehouse, Inc. for $1,250. Sold the older office equipment on account to Roger McFall for $650. Paid $3,000 on account to Computer Warehouse Inc., Check 101. Received $400 on account from Roger McFall. Paid $3,500 on account to Computer Warehouse Inc., Check 102. Bought computer on account from Pro Computer Company for $775. Appraise whether the accounting equation is in balance.

Chapter 5, Analyzing Transactions Affecting Problem 5A Revenue, Expenses, and Withdrawals Pamela Wong owns and operates Thunder Graphics Desktop Publishing. A partial list of the chart of accounts appears in your working papers.

Instructions On the forms provided in your working papers: 1. Prepare a T account for each account listed. 2. Analyze and record each of the following business transactions in the appropriate T accounts. Identify each transaction by number. 3. After recording all transactions, compute a balance for each account. 4. Test for the equality of debits and credits.

CONTINUE

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–53

A–53

9/17/05 1:30:13 PM

Problems

A PP EN D I X G Trans. No. 1 2 3 4 5 6 7 8 9 10 11 12

Analyze

Transactions Pamela Wong invested $25,000 in the business. Bought a new computer on account from Computer Warehouse, Inc. for $1,400. Ms. Wong invested office equipment, valued at $650, in the business. Paid the rent for the month, $750, Check 207. Wrote Check 208 for $145 for minor repairs to the equipment. Completed graphics design work on account for Adams, Bell, and Cox, Inc., $850. Paid the $175 utility bill, Check 209. Deposited the daily design receipts in the bank, $1,200. Sent Check 210 for $700 to Computer Warehouse, Inc. as payment on account. Received $425 from Adams, Bell, and Cox, Inc. Ms. Wong withdrew $150 for personal needs. Paid the $85 telephone bill, Check 211. Calculate the total expenses the business recorded in the above transactions.

Chapter 6, Problem 6A

Recording General Journal Transactions

Instructions On the form provided in your working papers, record the following transactions for the month of January on page 7 of the general journal for Thunder Graphics Desktop Publishing. Date Jan.

Transactions 1 3

7 10

15 17 20 27 29 31

Analyze A–54

Received $900 for completion of design work for Designers Boutique, Receipt 545. Purchased a desk, chairs, and table valued at $2,400 from Computer Warehouse, Inc. Made a down payment of $400 and agreed to pay the balance within 60 days, Check 801/Invoice CW402. Ran a $300 special feature ad in Solutions Software’s monthly magazine on account, Invoice SS60. Completed a $3,500 print production job for Adams, Bell, and Cox, Inc. Received a down payment of $500 and agreed to receive the balance within 30 days, Receipt 546/ Invoice TG90. Pamela Wong withdrew $1,500 from the business for personal use, Check 802. Paid a carpenter $175 to install a new office door, Check 803. Purchased a $4,000 computer system from Pro Computer Company on account, Invoice 783. Paid Computer Warehouse, Inc. $1,000 to apply on our account, Check 804. Wrote Check 805 for $300 to Solutions Software in payment of an ad purchased on July 7. Pamela Wong invested a $200 file cabinet in the business, Memo 40. Calculate the total cash the business received during January.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–54

9/17/05 1:30:14 PM

Problems

APPE NDIX G

Chapter 7, Journalizing and Problem 7A Posting Transactions The balances in the general ledger accounts of Thunder Graphics are shown below. 101 110 125 135 201 301 302 401 405 505 510

Cash in Bank Accounts Receivable—Roger McFall Office Equipment Computer Equipment Accts. Pay.—Computer Warehouse, Inc. Pamela Wong, Capital Pamela Wong, Withdrawals Design Revenue Print Production Revenue Maintenance Expense Miscellaneous Expense

$ 10,000 — 2,500 3,000 — 8,000 4,000 9,000 4,000 1,200 300

Instructions On the forms provided in your working papers: 1. Open the accounts in the general ledger with their beginning balances as of March 1 of the current year. 2. Record March transactions on page 15 of the general journal. 3. Post each journal entry to the appropriate accounts in the ledger. 4. Prove the ledger by preparing a trial balance. Date Mar.

Transactions 1 5 7

9 12

15 20

25 28 31

Analyze

Pamela Wong invested additional assets in the business: cash, $3,000, and office equipment, $500, Memorandum 75. Paid $600 to Premier Painters for painting the office, Check 912. Discovered that $1,500 in design revenue was incorrectly journalized and posted to the Print Production Revenue account last month, Memorandum 76. Purchased $3,600 computer system from Computer Warehouse, Inc. on account, Invoice CW204. Deposited $4,000 into the checking account. $3,000 was earned from design revenue and $1,000 from print production revenue, Receipts 300–310. Completed print production for Roger McFall. Sent him a bill for $600, Invoice TG601. Discovered that $50 in miscellaneous expense was incorrectly journalized and posted to the Maintenance Expense account, Memorandum 77. Pamela Wong withdrew $2,000 from the business, Check 913. Received $300 from Roger McFall to apply to his account, Receipt 311. Issued Check 914 for $1,800 to Computer Warehouse, Inc. to apply on our account. Compute the change in the cash account for March.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–55

A–55

9/17/05 1:30:15 PM

Problems

A PP EN D I X G

Chapter 8, Preparing a Six-Column Problem 8A Work Sheet The final balances in the general ledger of Thunder Graphics Desktop Publishing at the end of May are listed below. 101 105 110 113 115 120 125 130 135 201 205 207 301 305 310 401 405 501 505 510 520 530

Cash in Bank Accts. Rec.—Adams, Bell, and Cox Inc. Accts. Rec.—Roger McFall Accts. Rec.—Designers Boutique Accts. Rec.—Pat Cooper Office Supplies Office Equipment Office Furniture Computer Equipment Accts. Pay.—Computer Warehouse, Inc. Accts. Pay.—Pro Computer Company Accts. Pay.—Solutions Software Pamela Wong, Capital Pamela Wong, Withdrawals Income Summary Design Revenue Print Production Revenue Advertising Expense Maintenance Expense Miscellaneous Expense Rent Expense Utilities Expense

$16,095 1,729 281 — 714 228 5,027 2,940 8,200 4,027 2,441 — 24,927 2,400 — 8,116 4,050 735 1,335 285 3,100 492

Instructions Use the form in your working papers to prepare a work sheet for the month ended May 30.

Analyze

Identify the net income or net loss for the month of May, and explain its effect on the Pamela Wong, Capital account.

Chapter 9, Interpreting Financial Information Problem 9A You are applying for a job with Thunder Graphics Desktop Publishing. The job includes preparing financial statements. In order to determine your ability to do the job, the owner, Pamela Wong, has given you the following information. At the beginning of the last fiscal period, the Pamela Wong, Capital account had a balance of $46,295. At the end of the period, the account showed a balance of $49,152. During the period, Ms. Wong made an additional investment of $2,000 and had withdrawals of $600. The revenue for the period was $12,948.

Analyze

A–56

Use the form provided in your working papers to compute the total expenses for the period.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–56

9/17/05 1:30:16 PM

Problems

APPE NDIX G

Chapter 10, Preparing Closing Entries Problem 10A The work sheet of Thunder Graphics Desktop Publishing for the year ended December 31 is presented in your working papers.

Instructions Using the information in the work sheet, prepare the four journal entries to close the temporary capital accounts. Use general journal page 21 provided in your working papers.

Analyze

Compute the balance in the Pamela Wong, Capital account after the closing entries.

Chapter 11, Recording Deposits in Problem 11A the Checkbook On October 20, Pamela Wong, owner of Thunder Graphics Desktop Publishing, deposited the following in the checking account of the business. Cash: $800 Checks: Boyden Company; drawn on National Bank of Commerce; Monroe; ABA No 45-1204; $50.29. Gail’s Supplies; drawn on Regent Bank; Rayville; ABA No 49-3401; $255.48. Clinton Co.; drawn on Sun Federal Savings and Loan; Bastrop; ABA No 52-6429; $788.40. On October 21, Pamela Wong received the electricity bill from Central Utilities for $314.69 for September 17 to October 18 service. The October bank statement for Thunder Graphics listed a bank service charge of $21.80, dated October 23.

Instructions On the forms provided in your working papers: 1. Complete a deposit slip using the October 20 information. 2. Record the deposit on check stub 1068 using $2,468.14 as the balance brought forward. 3. Complete check stub 1068 and prepare Check 1068 to Central Utilities. Use October 22 as the date and sign your name as drawer. 4. Record this service charge in the checkbook on check stub 1069. 5. Journalize the entry for the bank service charge in the general journal. Use October 25 as the date. 6. Answer the following questions. a. What was the amount carried forward from check stub 1067? b. What was the checkbook balance before writing Check 1068? c. What was the total amount deposited on October 20? d. Identify the payee of Check 1068. e. What was the balance brought forward on check stub 1069?

Analyze

Assess the effect on net income if the bank service charge was not journalized.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–57

A–57

9/17/05 1:30:17 PM

Problems

A PP EN D I X G

Chapter 12, Preparing a Payroll Register Problem 12A Thunder Graphics Desktop Publishing has four employees. They are paid on a weekly basis with overtime paid for all hours worked over 40. The overtime rate is 1½ times the regular hourly rate of pay. The names of the employees and other information needed to prepare the payroll are as follows. Employee No.

Employee

Status

Exemptions

Rate/Hour

Union

173 168 167 175

Don Hoffman Manual Gongas Riley Sullivan Marcy Jackson

M S M S

1 0 2 1

$6.95 7.10 7.40 6.95

No Yes Yes Yes

During the week ended Oct. 15, Gongas worked 41 hours, Sullivan worked 39¼ hours, Jackson worked 42½ hours, and Hoffman worked 38¾ hours.

Instructions On the form provided in your working papers: 1. Prepare a payroll register. The date of payment is October 15. List employees in alphabetical order by last name. a. Compute FICA taxes at 6.2% for social security and 1.45% for Medicare. b. Use the tax table in Chapter 12 to determine federal income taxes. The state income tax is 1.5% of gross earnings. c. All employees have a deduction for hospital insurance that is $4.75 for single employees and $7.85 for married employees. d. Union members pay weekly dues of $3.25. 2. After the payroll information is entered in the payroll register, total the columns and check the accuracy of the totals.

Analyze

Identify the employee with the highest gross pay and the employee with the highest net pay.

Chapter 13, Recording Payroll Transactions Problem 13A Thunder Graphics Desktop Publishing pays its employees each week. The payroll register for the week ended December 17 is shown in your working papers.

Instructions On the general journal form provided in your working papers: 1. Record the December 17 payment of the payroll on page 34, Check 831. 2. Compute the employer’s payroll taxes (FICA tax rates, 6.2% social security, 1.45% Medicare; state unemployment tax rate, 5.4%; federal unemployment tax rate, 0.8%). 3. Record the journal entry for the employer’s payroll taxes. 4. Record the payment of all FICA and employees’ federal income taxes, Check 832. The previous account balances were: Employees’ Federal Income Tax Payable, $189, Social Security Tax Payable, $191.48, and Medicare Tax Payable, $44.92. 5. Record the income tax payment to the state, Check 833. The balance in the Employees’ State Income Tax Payable account before the December 17 payroll was $178.40.

Analyze

A–58

Calculate the company’s total FICA liability for the week ended December 17.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–58

9/17/05 1:30:18 PM

Problems

APPE NDIX G

Chapter 14, Recording and Posting Sales and Problem 14A Cash Receipt Transactions On January 1, T-Shirt Trends, a merchandising business, had the following balances in its general ledger and accounts receivable subsidiary ledger. General Ledger 101 Cash In Bank 115 Accounts Receivable 215 Sales Tax Payable 401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

$ 7,500 10,920 1,500 18,620 1,400 300

Accounts Receivable Subsidiary Ledger MOR Morales, Gabriela ROU Roundabout Fashions SAM Samstead Fashions SAN Sandpiper Sports Club

$ 420 3,150 5,250 2,100

Instructions On the forms provided in your working papers: 1. Open the general ledger accounts and record the January 1 balances. 2. Open the customer accounts in the accounts receivable subsidiary ledger and record the January 1 balances. 3. Record the January transactions. Use page 12 in the general journal. 4. Post the transactions to the general ledger and accounts receivable subsidiary ledger accounts. Date Jan.

Transactions 1 4 9

15 17 20 25 31 31

Analyze

Received a check for $3,087 from Roundabout Fashions payment of their $3,150 account less a 2% cash discount of $63, Receipt 82. Gabriela Morales notified us that $40 in T-shirts were defective. Issued Credit Memorandum 20 for $42, which includes a 5% sales tax of $2. Sold $1,000 in merchandise plus a sales tax of $50 to Roundabout Fashions on account, Sales Slip 90. Sandpiper Sports Club sent us a check in payment of their $2,100 account less a 2% cash discount, Receipt 83. Granted Samstead Fashions $252 credit for the return of $240 in merchandise plus a $12 sales tax, Credit Memorandum 21. Received a check from Roundabout Fashions in payment of their $1050 account balance less a cash discount of $21, Receipt 84. Samstead Fashions sent us a check for $2,000 to apply on their account, Receipt 85. Cash sales for the month were $5,000 plus $250 in sales tax, Tape 44. Bankcard transactions for the month were $6,000 plus $300 in sales tax, Tape 44. Break down January’s sales into cash sales (including bankcard) and sales on account.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–59

A–59

9/17/05 1:30:19 PM

Problems

A PP EN D I X G

Chapter 15, Recording Purchases and Cash Problem 15A Payment Transactions Business transactions for the month of March for T-Shirt Trends are presented below. A partial general ledger appears in your working papers.

Instructions On the form provided in your working papers, record March transactions on page 11 of the general journal. Date Mar.

Transactions 2

4 6

8 10 12 14 19 25

30

Analyze

Issued Check 5500 for $6,790 to Dancing Wind Clothing Manufacturers in payment of their $7,000 invoice less a 3% cash discount. Purchased $2,800 in merchandise on account from Wilmington Shirt Factory, Invoice WSF123, terms 2/10, n/30. Wrote Check 5501 for $180 to Mario’s Trucking for delivery of merchandise shipped from Wilmington Shirt Factory, FOB shipping point. Received a credit allowance of $300 from Wilmington Shirt Factory for damaged merchandise, issued Debit Memo 44. Received a premium notice from Keystone Insurance Company for $3,400, issued Check 5502. Bought $175 in supplies from Carter Office Supply on account, Invoice 97, terms n/30. Paid Wilmington Shirt Factory the $2,500 balance owed less a 2% cash discount, Check 5503. Returned $50 in supplies to Carter Office Supply, issued Debit Memorandum 45. Paid employees gross earnings of $4,000. Rates for taxes withheld are: Employees’ Federal Income Tax, 15%; State Income Tax, 6%; Social Security Tax, 6.2%; and Medicare Tax, 1.45%. Issued Check 5504 for the net amount. Wrote Check 5505 to Carter Office Supply for the amount due on our account. Determine the number of postings to the accounts payable subsidiary ledger based on the transactions provided.

Chapter 16, Recording and Posting Sales, Problem 16A Cash Receipts, and General Journal Transactions T-Shirt Trends, a retail merchandising store, uses special journals for recording its business transactions. On May 1, the store had the following balances in its general ledger and accounts receivable subsidiary ledger accounts.

A–60

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–60

9/17/05 1:30:20 PM

Problems General Ledger 101 Cash in Bank 115 Accounts Receivable 135 Supplies 215 Sales Tax Payable 401 Sales 405 Sales Discounts 410 Sales Returns and Allowances

$ 4,700 7,250 300 600 40,000 1,500 500

Accounts Receivable Subsidiary Ledger HAL Hal’s Fitness Studios HIO Dave Hioki MOR Gabriela Morales ROU Roundabout Fashions SAM Samstead Fashions SAN Sandpiper Sports Club WIL Virginia Williams

$ 1,500 200 100 2,000 2,500 900 50

APPE NDIX G

Instructions On the forms provided in your working papers: 1. Open the accounts and enter beginning balances in T-Shirt Trends’ general ledger. 2. Open the customer accounts in the accounts receivable subsidiary ledger and record the beginning balances. 3. Record the following transactions in the sales journal (page 9), the cash receipts journal (page 10), and the general journal (page 2). 4. Post to the customer accounts daily from the journals. 5. Post the entries in the General Credit column of the cash receipts journal daily. 6. Post general journal entries daily. 7. Foot, prove, total, and rule the sales and cash receipts journals. 8. Post the column totals from the special journals. 9. Prepare a schedule of accounts receivable. Date May

Transactions 1 3 5 7 9

11 13 14 15 15 18

Received a check for $50 from Virginia Williams in payment of her account, Receipt 202. Sandpiper Sports Club sent a check for $882 in payment of their $900 account less 2% cash discount, Receipt 203. Sold Virginia Williams $300 in merchandise plus 5% sales tax of $15, Sales Slip 404. Received a check for $1,470 from Hal’s Fitness Studios in payment of their $1,500 account balance less 2% cash discount, Receipt 204. Virginia Williams returned $100 in merchandise plus sales tax of $5, issued Credit Memo 50. Sold $700 in merchandise on account to Sandpiper Sports Club plus sales tax of $35, terms, 2/10, n/30, Sales Slip 405. Dave Hioki sent a check for $100 to apply on his account, Receipt 205. Received $25 from the sale of supplies to Hanson’s Market, Receipt 206. Cash sales amounted to $2,000 plus sales tax of $100, Tape 27. Bankcard sales were $1,500 plus sales tax of $75, Tape 27. Issued Credit Memo 51 to Roundabout Fashions for $210, which included $200 in defective merchandise and a sales tax of $10. CONTINUE

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–61

A–61

9/17/05 1:30:21 PM

Problems

A PP EN D I X G Date

Transactions (cont.)

22 23 24 27 28

Analyze

Sold $3,000 in merchandise on account to Hal’s Fitness Studios plus 5% sales tax of $150, Sales Slip 406. Samstead Fashions sent us a check for $1,250 to apply to their account, Receipt 207. Received a check for $100 from Gabriela Morales in payment of her account, Receipt 208. Sold Gabriela Morales $200 in merchandise plus 5% sales tax of $10, Sales Slip 407. Roundabout Fashions sent us a check for $900 to apply on their account, Receipt 209. Calculate the percentage of sales on account to total sales in May.

Chapter 17, Recording Special Journal and Problem 17A General Journal Transactions T-Shirt Trends, a retail merchandising business, uses special journals to record its business transactions.

Instructions On the forms provided in your working papers: 1. Record the July transactions in the sales journal (page 15), cash receipts journal (page 16), purchases journal (page 15), cash payments journal (page 16), and general journal (page 3). 2. Foot, prove, total, and rule the special journals. 3. Prove cash. The beginning cash in bank balance is $7,500. The check stub balance at the end of the month is $13,409. Date July

Transactions 2 2 3 4 5 6 6 7

A–62

Sold $500 in merchandise on account to Dave Hioki plus 5% sales tax, Sales Slip 333. Purchased $1,400 in merchandise on account from Cherokee Productions, Inc., Invoice 7001, terms 2/10, n/30. Issued Check 535 for $1,960 in payment of Dancing Wind Clothing Manufacturers $2,000 invoice less a 2% discount. Received $1,764 from Hal’s Fitness Studios in payment of our $1,800 invoice less a 2% discount, Receipt 200. Issued Credit Memo 27 to Gabriela Morales for the return of $100 in merchandise plus $5 sales tax. Purchased $2,000 in store equipment on account from Carter Office Supply, Invoice CO123, terms n/30. Received $2,450 from Sandpiper Sports Club in payment of our $2,500 invoice less a 2% discount, Receipt 201. Sold $1,000 in merchandise on account plus 5% sales tax to Virginia Williams, Sales Slip 334. CONTINUE

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–62

9/17/05 1:30:22 PM

Problems Date

APPE NDIX G

Transactions (cont.) 7 8 8 9

10 12 13 14 15 15 18 20 22 23 24 24 26 31 31 31

31

Analyze

Issued Debit Memo 14 for $300 to Wilmington Shirt Factory for credit taken on damaged merchandise. Wrote Check 536 to Chapel Hills Realtors in payment of monthly rent of $900. Sold old office equipment for $75 cash to Ann Martin, an employee, Receipt 202. Purchased $3,000 in merchandise on account from CompuRite Solutions, Invoice CR79, terms 2/10, n/30. Sold $3,500 in merchandise plus 5% sales tax on account to Roundabout Fashions, Sales Slip 335. Bought $150 in supplies from Palace Party Supplies, on account, Invoice 876. Issued Check 537 for $1,600 to Academy Insurance Company for annual business insurance premium. Wrote Check 538 to CompuRite Solutions for $2,940 in payment of Invoice CR79 for $3,000 less 2% discount. Cash sales amounted to $3,000 plus 5% sales tax, Tape 29. Bankcard sales were $5,000 plus 5% sales tax, Tape 29. Purchased $1,100 in merchandise on account from Sullivan Screen Printers, Invoice 423, terms 2/10, n/30. Purchased $750 in merchandise for cash from Cherokee Productions, Inc., Check 539. Paid the monthly utility bill, $150, Check 540. Purchased $4,500 in merchandise on account from Dancing Wind Clothing Manufacturers, Invoice 777, terms, 2/10, n/30. Received $525 from Dave Hioki to apply on his account, Receipt 203. Wrote Check 541 to Sullivan Screen Printers for $1,078 in payment of Invoice 423 for $1,100 less a 2% discount. Issued Debit Memo 15 for $200 to Dancing Wind Clothing Manufacturers for the return of merchandise. Cash sales amounted to $2,200 plus $110 sales tax, Tape 30. Bank card sales amounted to $1,500 plus $75.00 sales tax, Tape 30. Wrote Check 542 to pay the payroll of $2,000 (Gross Earnings) for the pay period ended July 31. The following amounts were withheld: employees’ federal income taxes, $300; FICA taxes, $124 for social security and $29 for Medicare; employees’ state income taxes, $60. Recorded the employer’s payroll taxes (FICA tax rate, 6.2% for social security, and 1.45% for Medicare; federal unemployment tax rate, 0.8%; and state unemployment rate, 5.4%). Identify any transactions recorded in the purchases journal that were not for merchandise to resell.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–63

A–63

9/17/05 1:30:23 PM

Problems

A PP EN D I X G

Chapter 18, Calculating Adjustments and Problem 18A Preparing the Ten-Column Work Sheet A partially completed work sheet for T-Shirt Trends is shown in your working papers. Adjustments need to be made to the following items at year-end. Data for Adjustments Merchandise Inventory, December 31 Supplies on hand, December 31 Insurance premium expired during the period Additional federal corporate income tax owed

$47,394 678 1,260 168

Instructions On the form provided in your working papers, complete the December 31 work sheet including adjustments for T-Shirt Trends.

Analyze

Identify which asset accounts are affected by adjustments.

Chapter 19, Preparing Financial Statements Problem 19A The completed work sheet for T-Shirt Trends for the year ended December 31 appears in your working papers.

Instructions On the forms provided in your working papers, prepare the following financial statements: 1. The income statement for the fiscal year ended December 31. 2. A statement of retained earnings. 3. A balance sheet.

Analyze

Identify the change in the Retained Earnings account during the year.

Chapter 20, Journalizing Closing Entries Problem 20A The account balances for T-Shirt Trends appear in your working papers as of December 31.

Instructions On the form provided in your working papers, journalize all the closing entries on page 17 in the general journal.

Analyze

Identify the balance in the Income Summary account before it was closed to Retained Earnings.

Chapter 21, Recording Stockholders’ Problem 21A Equity Transactions T-Shirt Trends was organized as a publicly held corporation on September 1 and authorized to issue 10,000 shares of $100 par, $8 preferred stock, and 25,000 shares of $50 par common stock.

A–64

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–64

9/17/05 1:30:24 PM

Problems

APPE NDIX G

Instructions On the form provided in your working papers, record the following transactions on page 1 of the general journal. Date 2010 Sept. 1 12 Nov. 15 Dec. 16 2011 Mar. 24 Aug. 15

15

Sept. 15 30 Dec. 31

Analyze

Transactions Issued 4,000 shares of $8 preferred stock at $100 per share, Receipt 101. Issued 12,000 shares of common stock at $50 per share, Receipt 102. Received $52.50 per share for 2,500 shares of common stock issued, Receipt 215. Received $5,000 for 50 shares of $8 preferred stock issued, Receipt 298. Issued 1,000 shares of common stock at $55 per share, Receipt 389. Declared a dividend of $32,400 on 4,050 shares of $8 preferred stock outstanding, payable on September 15 to stockholders of record on September 1, Memorandum 316. Declared cash dividend of 25¢ per share on 15,500 shares of common stock outstanding, payable on September 30 to stockholders of record on September 1, Memorandum 317. Paid preferred stock dividend declared August 15, Check 1763. Paid common stock dividend declared August 15, Check 1802. Prepared the closing entries in the general journal to close Income Summary for the net income of $102,600 and to close the two Dividends accounts. Identify the effect on Retained Earnings of the dividends declared on August 15.

Chapter 22, Maintaining a Petty Cash Register Problem 22A Maureen Miller operates T-Shirt Trends, a T-shirt specialty business. She established a petty cash fund on February 1 by writing Check 336 for $100. She also records all petty cash disbursements in a petty cash register. Petty cash disbursements are usually made for expenses such as office supplies, delivery expense, miscellaneous expenses, and advertising expense.

Instructions On the forms provided in your working papers: 1. Record the establishment of the petty cash fund on the first line of the petty cash register, page 1. 2. Record each of the following petty cash disbursements in the petty cash register. 3. Foot, prove, total, and rule the petty cash register at the end of the month. 4. Reconcile the petty cash fund. An actual cash count of the fund shows a balance of $5.68. 5. Check 362 was issued to replenish the petty cash fund. Record the replenishment information in the petty cash register.

CONTINUE

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–65

A–65

9/17/05 1:30:25 PM

Problems

A PP EN D I X G Date Feb.

Transactions 1 3 5 6 8

10 13 15 19 22 26 27 28 28 28

Analyze

SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 23A 1. Select the spreadsheet template for Problem 23A. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

At the end of February, conclude whether cash was short or over, by what amount, and whether this should be recorded as a revenue or an expense.

Chapter 23, Calculating and Recording Problem 23A Depreciation Expense The T-Shirt Trends Company purchased a delivery truck on October 12, 2009, at a cost of $78,900. The delivery truck has an estimated useful life of three years and an estimated disposal value of $900.

Instructions On the forms provided in your working papers: 1. Prepare a depreciation schedule for the delivery truck using the straight-line method. 2. Record the following transactions on general journal page 41. Post the transactions to the ledger accounts provided. 3. Answer the following questions. a. How did you determine the depreciation from October 12 to December 31? b. What was the book value of the truck on December 31, 2009? c. What was the book value of the truck on December 31, 2010? d. How did you determine the annual depreciation on December 31, 2012? Date 2009 Dec. 31 2010 Dec. 31

Analyze

A–66

Paid $1.20 for postage due on a letter, Voucher 101. Purchased a $9 ad in the Towne Sentinel paper, Voucher 102. Bought a ream of typing paper for $4.75, issued Voucher 103. Paid $6 for a mailgram, Voucher 104. Issued Voucher 105 for $9.90 to Express Couriers in payment for the delivery of packages. Paid the newscarrier $4.10 for daily newspapers and issued Voucher 106. Bought pens, pencils, and memo pads for $6.60, Voucher 107. Purchased a $9.50 advertisement in a local trade journal, Voucher 108. Issued Voucher 109 for $8.70 for office supplies. Express Couriers delivered financial data from a client, $9.90, Voucher 110. Issued Voucher 111 for $2.12 for additional postage due on mail. Bought an ad in the Towne Sentinel for $8.70 and issued Voucher 112. Purchased a typewriter ribbon for $5.50, issuing Voucher 113. Voided Voucher 114 due to an error. Issued Voucher 115 for $4.10 to the newscarrier.

Transactions Recorded the adjusting entry for the year’s depreciation expense on the delivery truck. Recorded the adjusting entry for the year’s depreciation expense on the delivery truck. Identify how much depreciation expense will be recorded over the useful life of the asset. Identify which account will show the depreciation recorded over the asset’s useful life.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–66

9/17/05 1:30:26 PM

Problems

APPE NDIX G

Chapter 24, Calculating and Recording Problem 24A Uncollectible Accounts Expense T-Shirt Trends uses the allowance method of accounting for uncollectible accounts. At the end of the fiscal period, the following accounts appeared on T-Shirt’s trial balance. Accounts Receivable $ 18,647.25 Allowance for Uncollectible Accounts 1,060.50 Sales 452,612.00 Sales Discounts 5,431.35 Sales Returns and Allowances 13,578.36 Uncollectible Accounts Expense 0.00

Instructions On the forms provided in your working papers: 1. Determine the amount of the adjustment for uncollectible accounts for the fiscal period ended December 31. Management estimates that uncollectible accounts will be 1.25% of net sales. 2. Journalize the adjusting entry in the general journal, page 10. 3. Post the adjusting entry to the general ledger accounts. 4. Determine the book value of accounts receivable.

Analyze

When an account is written off in the next fiscal period, identify the account to be debited.

Chapter 25, Accounting for Inventories Problem 25A The Shoooot-It Camera Shop uses a one-year fiscal period beginning January 1. At the beginning of the fiscal period, the shop had a beginning inventory of film valued at $867.90 (526 rolls at $1.65 per roll). During the year, the shop made the following purchases: January 13 400 rolls of film @ $1.67  $ 668 March 2 600 rolls of film @ $1.73  1,038 April 14 300 rolls of film @ $1.76  528 July 8 700 rolls of film @ $1.79  1,253 September 3 200 rolls of film @ $1.81  362 November 19 300 rolls of film @ $1.83  549 Totals 2,500 rolls $4,398 There were 621 rolls of film in inventory at the end of the fiscal year.

Instructions On the form provided in your working papers, calculate the cost of the ending inventory using the specific identification, FIFO, LIFO, and weighted average cost methods. For the specific identification method, 165 of the rolls were purchased on September 3 and 456 were purchased on July 8.

Analyze

Conclude which inventory valuation method gives the highest value to Shoooot-It’s ending inventory.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–67

A–67

9/17/05 1:30:27 PM

Problems

A PP EN D I X G

Chapter 26, Calculating Current and Problem 26A Future Interest SPREADSHEET SMART GUIDE Step–by–Step Instructions: Problem 26A 1. Select the spreadsheet template for Problem 26A. 2. Enter your name and the date in the spaces provided on the template. 3. Complete the spreadsheet using the instructions in your working papers. 4. Print the spreadsheet and proof your work. 5. Complete the Analyze activity. 6. Save your work and exit the spreadsheet program.

Frequently, notes that are issued or received in one fiscal period do not mature until the next fiscal period. As a result, the interest expense paid or the interest income received applies to two different fiscal periods. Listed below is the information for 10 different notes.

Instructions On the form provided in your working papers, determine the following for each note. 1. Determine the maturity date. Assume February has 28 days. 2. Determine what portion of the interest applies to the current year and what portion of the interest applies to the following year. December 31 is the end of the fiscal period. Amount Issue Date Interest Rate Term 1. $ 1,100 December 10 9% 30 days 2. 700 November 21 12% 60 days 3. 17,100 October 10 10% 90 days 4. 4,000 December 5 15% 60 days 5. 15,000 November 10 6.5% 120 days 6. 3,000 September 8 7% 180 days 7. 6,600 November 17 10% 70 days 8. 840 October 1 9.5% 6 months 9. 1,200 December 1 10% 3 months 10. 2,700 August 1 8% 9 months

Analyze

Identify which notes will have more interest expense for the following year as compared to the current year.

Chapter 26, Recording Non-Interest-Bearing Problem 26B Notes Payable Your company, National Paper Supplies, frequently borrows money for short periods from First Bank by issuing promissory notes.

Instructions In your working papers, record the following transactions on page 6 of the general journal. Date Jan.

15

Apr.

15

Oct.

31

Dec. 31

Analyze

A–68

Transactions Borrowed $12,000 from First Bank by issuing a 90-day, non-interestbearing note payable that the bank discounted at 12%, Note 45. Issued Check 2561 for $12,000 in payment of the note issued Jan.15 and recorded the interest expense. Borrowed $18,000 from First Bank by issuing a 120-day, non-interestbearing note payable that the bank discounted at 13%, Note 46. Made an adjusting entry to record the accrued interest expense for Note 46 at year-end. Calculate the amount of interest expense incurred in the current year for Notes 45 and 46.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–68

9/17/05 1:30:28 PM

Problems

APPE NDIX G

Chapter 27, Recording Partners’ Investments Problem 27A On June 15, Walter Cohen and Janice Connor agreed to combine their individual sole proprietorships into one firm organized as a partnership called Cohen & Connor Legal Services. The partners were to invest all the assets of their two former businesses. Those assets are listed below. Cash Accounts Receivable Merchandise Inventory Equipment

Cohen $247,000 78,000 123,000 154,500

Connor $517,500

Instructions Prepare the general journal entries (page 1) required to record the partners’ investments. The source document is Memorandum 1.

Analyze

Calculate the total of all the assets contributed to the new partnership.

Chapter 28, Liquidation of a Partnership Problem 28A The partnership of Joyce, Jane, and Jill is liquidating. The partnership account balances as of November 30 are: Cash Accounts Receivable Inventory Equipment

$ 8,000 16,000 8,000 3,000

Accounts Payable Joyce, Capital Jane, Capital Jill, Capital

$ 8,000 10,800 13,200 3,000

Profits and losses are shared 4:5:1 to Joyce, Jane, and Jill respectively. Date Dec.

1 8 15 23 24

Transactions The accounts receivable are sold for $15,000. The inventory is sold for $7,000. The equipment is sold for $5,000. The accounts payable are paid in full. The balance of cash is distributed to the partners.

Instructions Prepare the entries required to liquidate the partnership. Start with general journal page 213.

Analyze

Calculate the gain or loss on each asset that was sold.

Appendix G Additional Reinforcement Problems

A52-A69_AppG_868829.indd A–69

A–69

9/17/05 1:30:29 PM

APPENDIX H

Answers to Section Assessment Problems

Chapter 1 Problem 1-1 Perform an honest analysis of likes and dislikes. Use the chart on page 7 to help identify skills and traits you possess. Problem 1-2 Use the personal career profile form (Figure 1-1) as a reference for the types of information. List personal information (values, interests, skills, etc.) and then select three possible careers. Problem 1-3 The possibility for individuals with accounting degrees vary but include careers as: tax accountants, auditors, management accountants, controllers, or chief financial officers. Problem 1-4 For the accountants mentioned in the section: Drew Taylor – Interested in working with numbers and music. Maya Cruz – Involved in environmental causes, studied accounting. Jana Passeno – Interested in serving the public; good at decision making. Problem 1-5 Answers will vary. Problem 1-6 Answers will vary.

Chapter 2 Problem 2-1 Perform an honest analysis of personal traits. Try to relate the answers to personal activities and experiences that correspond with entrepreneurship.

Problem 2-3 Greenwood Sky Divers is the name of the business entity. It has been in business for six years, and is a “going concern.” The accounting period for Greenwood Sky Divers is one year.

Chapter 3 Problem 3-1 1. $10,000 2. $26,000 3. $3,000 4. $26,000 5. $6,000 6. $13,000 7. $16,000 8. $8,000 9. $21,000 10. $20,000 11. $35,000 12. $4,500 Problem 3-2 1. Cash in Bank increased $30,000. Jan Swift, Capital increased $30,000. 2. Office Furniture increased $700. Jan Swift, Capital increased $700. 3. Cash in Bank decreased $4,000. Computer Equipment increased $4,000. 4. Office Furniture increased $5,000. Accounts Payable increased $5,000. 5. Accounts Receivable increased by $700. Office Furniture decreased $700. 6. Cash in Bank decreased $2,000. Accounts Payable decreased $2,000. Problem 3-3 1. Cash in Bank decreased by $50. Jan Swift, Capital decreased by $50.

Problem 2-2 The situations such as these have opposing viewpoints. The drop in sales could signal that a new salesperson is needed or some improvements are in order. Some owners, though, may be reluctant to invest more money in a business where sales are down. You might ask for new paint and awnings in return for the higher rent.

A–70

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–70

4/6/06 6:48:39 PM

Answers 2. Cash in Bank increased by $1,000. Jan Swift, Capital increased by $1,000. 3. Cash in Bank decreased by $600. Jan Swift, Capital decreased by $600. 4. Cash in Bank decreased by $800. Jan Swift, Capital decreased by $800. 5. Cash in Bank increased by $200. Accounts Receivable decreased by $200.

Chapter 4 Problem 4-1 Office Equipment – asset, debit, credit, debit Accounts Payable – liability, credit, debit, credit Accounts Receivable – asset, debit, credit, debit R. Lewis, Capital – owner’s equity, credit, debit, credit Problem 4-2 1a. The asset Office Equipment is increased. Increases in assets are recorded as debits. b. The liability Accounts Payable is increased. Increases in liabilities are recorded as credits. 2a. The asset Office Furniture is increased. Increases in assets are recorded as debits. b. The owner’s capital account Alice Roberts, Capital is increased. Increases in the owner’s capital account are recorded as credits. 3a. The liability Accounts Payable is decreased. Decreases in liabilities are recorded as debits. b. The asset Cash in Bank is decreased. Decreases in assets are recorded as credits.

Chapter 5 Problem 5-1 Cash in Bank—asset, debit, credit, debit Accounts Receivable—asset, debit, credit, debit Airplanes—asset, debit, credit, debit Accounts Payable—liability, credit, debit, credit Caroline Palmer, Capital—owner’s equity, credit, debit, credit Caroline Palmer, Withdrawals—owner’s equity, debit, credit, debit Flying Fees—revenue, credit, debit, credit Advertising Expense—expense, debit, credit, debit Food Expense—expense, debit, credit, debit Fuel and Oil Expense—expense, debit, credit, debit Repairs Expense—expense, debit, credit, debit Problem 5-2 1. Dr. Utilities Expense; Cr. Cash in Bank 2. Dr. Accounts Receivable; Cr. Service Fees 3. Dr. John Albers, Withdrawals; Cr. Cash in Bank 4. Dr. Advertising Expense; Cr. Cash in Bank

APPE NDIX H

Chapter 6 Problem 6-1 1. JayMax Office Supply 2. Dario’s Accounting Services 3. April 9, 20-4. 479 5. Fax Machine 6. $299 7. Payable in 30 days Problem 6-2 Step 1 D Step 2 F Step 3 E Step 4 B Step 5 A Step 6 C Problem 6-3 1. Passenger Van, asset, increase, debit; Cash in Bank, asset, decrease, credit 2. Utilities Expense, expense, increase, debit; Cash in Bank, asset, decrease, credit 3. Cash in Bank, asset, increase, debit; Day Care Fees, revenue, increase, credit

Chapter 7 Problem 7-1 Cash in Bank $10,000 Dr. Accounts Receivable – Mark Cohen $2,000 Dr. Accounts Payable – Jenco Industries $1,000 Cr. Tom Torrie, Capital $35,000 Cr. Admissions Revenue $0 Problem 7-2 Account Balances: Cash in Bank $10,000 (Dr.) David Serlo, Capital $10,000 (Cr.) Problem 7-3 May 20: Dr. Office Equip. $1,500; Cr. Computer Equip. $1,500; Memorandum 47 Problem 7-4 July 7: Dr. Advertising Expense $300; Cr. Rent Expense $300; Memoradum 13

Chapter 8 Problem 8-1 Store Equipment, asset, debit Rent Expense, expense, debit Service Fees Revenue, revenue, credit Accounts Payable–Rubino Supply, liability, credit Scott Lee, Capital, owner’s equity, credit

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–71

A–71

9/13/05 4:23:38 PM

A PP EN D I X H

Answers

Advertising Expense, expense, debit Accounts Receivable–John Langer, asset, debit Scott Lee, Withdrawals, owner’s equity, debit Maintenance Expense, expense, debit Office Supplies, asset, debit Problem 8-2 1. Hailey Office Supply 2. Garmot Electrical Co. 3. June 15 4. $6.23 5. Two 6. The invoice number is 220 Problem 8-3 Store Equipment, Balance Sheet, debit Rent Expense, Income Statement, debit Service Fees Revenue, Income Statement, credit Accounts Payable–Rubino Supply, Balance Sheet, credit Scott Lee, Capital, Balance Sheet, credit Advertising Expense, Income Statement, debit Accounts Receivable–John Langer, Balance Sheet, debit Scott Lee, Withdrawals, Balance Sheet, debit Maintenance Expense, Income Statement, debit Office Supplies, Balance Sheet, debit

Chapter 9 Problem 9-1 1. Stratford Learning Ctr. 5. August 21 2. $832 6. Rose Hughes 3. Sandra Miller 7. Roxbury 4. Payment on account Problem 9-2 1. $62,500 4. $10,630 2. $29,915 5. $7,060 3. $29,470 6. $25,010 Problem 9-3 Return on Sales = 20.53%

Chapter 10 Problem 10-1 1. Dr. Ticket Revenue $6,000; Cr. Income Summary $6,000 2. Dr. Income Summary $3,100; Cr. Gas and Oil Expense $700, Miscellaneous Expense $600, Utilities Expense $1,800 Problem 10-2 1.,2. Dr. Utilities Expense $129; Cr. Cash in Bank $129 3.,4. Dr. Income Summary $129; Cr. Utilities Exp. $129

A–72

Problem 10-3 Accts. Rec.–Linda Brown, Balance Sheet, No, Yes Advertising Expense, Income Statement, Yes, No Cash in Bank, Balance Sheet, No, Yes Exercise Class Revenue, Income Statement, Yes, No Exercise Equipment, Balance Sheet, No, Yes Income Summary, N/A, Yes, No Laundry Equipment, Balance Sheet, No, Yes Maintenance Expense, Income Statement, Yes, No Membership fees, Income Statement, Yes, No Miscellaneous Expense, Income Statement, Yes, No Office Furniture, Balance Sheet, No, Yes Rent Expense, Income Statement, Yes, No Repair Tools, Balance Sheet, No, Yes Ted Chapman, Capital, Balance Sheet, Yes, Yes Ted Chapman, Withdrawals, Balance Sheet, Yes, No Utilities Expense, Income Statement, Yes, No

Chapter 11 Problem 11-1 1.,2. Total Deposit $967.08 3. Balance $2,394.24 4. Balance $2,394.24 5. Balance $2,119.24 Problem 11-2 1. $100 2. $25 3. Miscellaneous Expense

Chapter 12 Problem 12-1 Longas, Jane: 43, $7.25, $290, $32.63, $322.63 Lang, Richard: 38, $7.80, $296.40, $0, $296.40 Quinn, Betty: 44 1/4, $8.30, $332.00, $52.91, $384.91 Sullivan, John: 39 1/2, $8.30, $327.85, $0, $327.85 Talbert, Kelly: 40, $7.50, $300.00, $0, $300.00 Trimbell, Gene: 42 1/2, $9.75, $390.00, $36.56, $426.56 Varney, Heidi: 34 1/4, $8.75, $299.69, $0, $299.69 Wallace, Kevin: 46, $9.25, $370.00, $83.25, $453.25 Problem 12-2 Cleary, Kevin: S, 0, $155.60, $9.65, $2.26, $16, $3.11, $31.02, $124.58 Halley, James: S, 1, $184.10, $11.41, $2.67, $12, $3.68, $29.76, $154.34 Hong, Kim: S, 0, $204.65, $12.69, $2.97, $23, $4.09, $42.75, $161.90 Jackson, Marvin: M, 1, $216.40, $13.42, $3.14, $6, $4.33, $26.89, $189.51 Sell, Richard: M, 2, $196.81, $12.20, $2.85, $0, $3.94, $18.99, $177.82 Totals: $957.56, $59.37, $13.89, $57, $19.15, $149.41, $808.15

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–72

9/13/05 4:23:39 PM

Answers Problem 12-3 Medicare $4.57 Social Security $19.53 Federal Income Tax $32.00 Problem 12-4 Check number 79, net pay $263.94

Chapter 13 Problem 13-1 1. $2,193.40 4. $33.75 2. $31.80 5. $1,690.15 3. $503.25 Problem 13-2 Social Security Tax Payable $299.87 Medicare Tax Payable $70.13 Federal Unemployment Tax Payable $38.69 State Unemployment Tax Payable $261.18 Problem 13-3 Employees’ federal income tax, payroll entry Employer’s social security tax, payroll tax entry U.S. savings bonds, payroll entry Employer’s Medicare tax, payroll tax entry Federal unemployment tax, payroll tax entry Employees’ state income tax, payroll entry Union dues, payroll entry Employees’ social security tax, payroll entry State unemployment tax, payroll tax entry Employees’ Medicare tax, payroll entry Problem 13-4 April 30: Dr. Social Security Tax Payable $318.55, Medicare Tax Payable $113.28, Employees’ Federal Income Tax Payable $286; Cr. Cash in Bank $717.83 April 30: Dr. State Income Tax Payable $205.60; Cr. Cash in Bank $205.60 Problem 13-5 Dr. Salaries Exp. $1,328.07, Cr. Soc. Sec. Tax Pay. $82.34, Cr. Medicare Tax Payable $19.26, Cr. Fed. Inc. Tax Pay. $184.00, Cr. State Inc. Tax. Pay. $26.56, Cr. Hosp. Ins. Prem. Pay. $20.00, Cr. Cash in Bank $995.91

Chapter 14 Problem 14-1 Ending account balances: Cash in Bank $554 Accounts Receivable $3,000 Sales $3,554 Problem 14-2 Sept. 1: Dr. Accts. Rec./James Palmer $318; Cr. Sales $300, Sales Tax Pay. $18; Sales Slip 101 Sept. 4: Dr. Accts. Rec./Anna Rodriguez $636; Cr. Sales $600, Sales Tax Pay. $36; Sales Slip 102 Sept. 7: Dr. Sales Ret. + Allow. $300, Sales Tax Pay. $18;

APPE NDIX H

Cr. Accts. Rec./James Palmer $318; Credit Memo. 15 Sept. 19: Dr. Sales Ret. + Allow. $40, Sales Tax Pay. $2.40; Cr. Accts. Rec./Anna Rodriguez $42.40; Credit Memo. 16 Problem 14-3 May 15: Dr. Cash in Bank $1908; Cr. Sales $1800, Sales Tax Payable $108; Tape 40 Problem 14-4 Mar. 1: Dr. Cash in Bank $140.40; Cr. Sales $130, Sales Tax Payable $10.40; Sales Slip 49 Mar. 5: Dr. Accts. Rec./Kelly Wilson $324; Cr. Sales $300, Sales Tax Payable $24; Sales Slip 55 Mar. 17: Dr. Cash in Bank $810; Cr. Sales $750, Sales Tax Payable $60; Tape 65

Chapter 15 Problem 15-1 1. Case Construction Company 2. Westmoreland Paint and Supply Company 3. 7894 4. November 15, 20-5. December 1, 20-6. 25 gallons 7. 5 8. White, gray, brown, beige and peach. 9. $20.00 10. $500.00 Problem 15-2 Sept. 2: Dr. Purchases $900; Cr. Accts. Pay./Sunrise Novelty Supply $900; Invoice SN110 Sept 7: Dr. Accts. Pay./Sunrise Novelty Supply $50; Cr. Purchases Returns and Allowances $50; Debit Memorandum 18 Problem 15-3 Nov. 12: Dr. Accts. Pay./Randall’s Café and Bookstore $16.00; Cr. Purchases Ret. and Allow. $16.00; Debit Memo 559 Problem 15-4 May 1: Dr. Purchases $10,500; Cr. Cash in Bank $10,500; Check 1150 May 5: Dr. Transportation In $325; Cr. Cash in Bank $325; Check 1151 May 7: Dr. Prepaid Insurance $2,500; Cr. Cash in Bank $2,500; Check 1152

Chapter 16 Problem 16-1 Ending debit balance: Accounts Receivable $27,720 Ending credit balances: Sales Tax Payable $2,020 Sales $37,000

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–73

A–73

4/6/06 6:48:44 PM

A PP EN D I X H

Answers

Problem 16-2 1. Sales credit $820, Sales Tax Payable credit $41, Accounts Receivable debit $861 2. Ending Balance $1,161 Problem 16-3 Totals: General credit $105 Sales credit $6,200 Sales Tax Payable credit $372 Accounts Receivable credit $5,580 Sales Discounts debit $110 Cash in Bank debit $12,147 Total debits/credits $12,257

Chapter 17 Problem 17-1 Column totals: Accounts Payable $4,550 Purchases $3,600 General $950 Problem 17-2 Ending Cash in Bank balance $5,610.59 Problem 17-3 Nov. 2: Dr. Accts. Pay./Colonial Products Inc. $900; Cr. Purchases Discounts $27, Cash in Bank $873; Check 104

Chapter 18 Problem 18-1 1. More 2. $1,533 3. Merchandise Inventory 4. Income Summary Problem 18-2 1. Amount $2,454.70 Account debited, Supplies Expense Account credited, Supplies 2. Amount $740 Account debited, Insurance Expense Account credited, Prepaid Insurance 3. Amount $105 Account debited, Federal Corporate Income Tax Expense Account credited, Federal Corporate Income Tax Payable Problem 18-3 1. $9,995 2. Balance Sheet

A–74

3. $3,710 4. $155 Problem 18-4 1. Rotary Supply Corporation 2. 6 3. $177.09 4. Accounts Payable—K & L Electrical 5. Purchases Returns and Allowances

Chapter 19 Problem 19-1 1. Kevin Cleary, Capital 2. Capital Stock 3. Capital Stock and Retained Earnings Problem 19-2 Subtotal $70.25, sales tax $2.81 Total $73.06 Problem 19-3 1. $96,506 2. $16,703 3. $27,783 4. $17,148 Problem 19-4 1. Office Equipment, Merchandise Inventory. 2. Federal Unemployment Tax Payable. 3. It increased by $18,358.72, or 14.49%. 4. 165.26% 5. The increase in Accounts Receivable indicates that either the company is selling more product or is less efficient at collecting payments. The decrease in Accounts Payable indicates that the company is paying bills earlier. In order to see the whole picture, one would need to analyze the data in relation to the other financial statements. 6. The company prepaid for a new insurance contract.

Chapter 20 Problem 20-1 Accounts Receivable, no Bankcard Fees Expense, yes, credited, debited Capital Stock, no Cash in Bank, no Equipment, no Fed. Corp. Income Tax Expense, yes, credited, debited Fed Corp. Income Tax Payable, no Income Summary, yes, depends (loss = credit), depends (loss = credit) Insurance Expense, yes, credited, debited Merchandise Inventory, no Miscellaneous Expense, yes, credited, debited Prepaid Insurance, no Purchases, yes, credited, debited

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–74

4/6/06 6:48:45 PM

Answers Purchases Discounts, yes, debited, credited Purchases Returns and Allowances, yes, debited, credited Retained Earnings, yes, depends (loss = debit), depends (loss = credit) Sales, yes, debited, credited Sales Discounts, yes, credited, debited Sales Returns and Allowances, yes, credited, debited Sales Tax Payable, no Supplies, no Supplies Expense, yes, credited, debited Transportation In, yes, credited, debited Utilities Expense, yes, credited, debited Problem 20-2 July 12: Dr. Rent Exp. $750; Cr. Cash in Bank $750 Problem 20-3 Collecting and verifying source documents Analyzing business transactions Journalizing business transactions Posting journal entries to ledgers Preparing a trial balance Completing the work sheet Preparing financial statements Journalizing and posting adjusting entries Journalizing and posting closing entries Preparing a post-closing trial balance

Chapter 21 Problem 21-1 1. 30,000 shares of common stock were issued at par, $10 per share in cash. 2. 2,000 shares of preferred stock were issued at par, $100 per share in cash. 3. 50,000 shares of common stock, par $10, were issued at $14 per share. Problem 21-2 1. $87,500 2. $262,500 Problem 21-3 Apr. 1: Dr. Dividends—Common $5,679; Cr. Dividends Payable—Common $5,679; Memorandum 37 Apr. 30: Dr. Dividends Payable—Common $5,679; Cr. Cash in Bank $5,679; Check 221 Problem 21-4 The transactions that are reported on the statement of stockholders’ equity are 2, 3, 6, and 8.

Chapter 22 Problem 22-1 1. Net cash $1,016.84 Cash short $5

APPE NDIX H

2. Mar 31: Dr. Cash in Bank $1,016.84, Cash Short and Over $5; Cr. Sales $964, Sales Tax Payable $57.84 Problem 22-2 1. Net cash $1,595.77 Cash over $10 2. Apr. 14: Dr. Cash in Bank $1,595.77; Cr. Sales 1,496, Sales Tax Pay. $89.77, Cash Short and Over $10 Problem 22-3 Check $39.51; new check stub balance $77,393.35

Chapter 23 Problem 23-1 Accounts Receivable, current Building, plant Cash in Bank, current Change Fund, current Delivery Equipment, plant Land, plant Merchandise Inventory, current Office Equipment, plant Office Furniture, plant Petty Cash Fund, current Prepaid Insurance, current Store Equipment, plant Supplies, current Problem 23-2 Cash register $420, $60, $40 Computer $5,000, $1,000, $166.67 Conference table $1,800, $72, $36 Delivery truck $30,000, $6,000, $1,500 Desk $2,880, $144, $132 Problem 23-3 Book Value: 10/01/2011, $12,500 12/31/2011, $11,960 12/31/2012, $9,800 12/31/2013, $7,640 12/31/2014, $5,480 12/31/2015, $3,320 09/31/2016, $1,700 Problem 23-4 1. June 4: Dr. Office Equipment $3,456; Cr. Cash in Bank $3,456; Invoice 14492 2. Dec. 31: Dr. Depreciation Expense $379.87; Cr. Accumulated Depreciation $379.87 3. Dec. 31: Dr. Depreciation Expense $651.20; Cr. Accumulated Depreciation $651.20 Problem 23-5 1. Book Value: Jan. 7, $2,360 First year, $1,908

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–75

A–75

4/6/06 6:48:46 PM

A PP EN D I X H

Answers

Second year, $1,456 Third year, $1,004 Fourth year, $552 Fifth year, $100 2. Dec. 31: Dr. Depr. Exp.—Office Equip. $452; Cr. Accum. Depr.—Office Equip. $452 3. Dec. 31: Dr. Income Summary $452; Cr. Depr. Exp.—Office Equip. $452 4. $100, Yes

Chapter 24 Problem 24-1 Journal Entries Apr. 10: Dr. Accts. Rec./Sonya Dickson $630; Cr. Sales $600, Sales Tax Pay. $30; Sales Slip 928 Nov. 30: Dr. Uncollectible Accounts Expense $630; Cr. Accts. Rec./Sonya Dickson $630; Memorandum 78 Dec. 30: Dr. Accts. Rec./Sonya Dickson $630; Cr. Uncollectible Accounts Expense $630; Memorandum 89 Dec. 30: Dr. Cash in Bank $630; Cr. Accts. Rec./Sonya Dickson $630; Receipt 277 Ledger Balances Ending debit balances: Cash in Bank $10,058 Accounts Receivable $7,290 Uncollectible Accounts Expense $928 Accts. Rec.—Sonya Dickson $0 Ending credit balances: Sales Tax Pay. $278 Sales $24,760 Problem 24-2 Journal Entries May 4: Dr. Allowance for Uncollectible Accounts $1,050; Cr. Accts. Rec./Jack Bowers $1,050; Memorandum 241 Nov. 18: Dr. Accts. Rec./Jack Bowers $1,050; Cr. Allowance for Uncollectible Accounts $1,050; Memorandum 321 Nov. 18: Dr. Cash in Bank $1,050; Cr. Accts. Rec./Jack Bowers $1,050; Receipt 1078 Dec. 31: Dr. Uncollectible Accounts Expense $1,850; Cr. Allowance for Uncollectible Accounts $1,850 Ledger Balances Ending debit balances: Cash in Bank $10,470

A–76

Accounts Receivable $19,350 Uncollectible Account Expense $1,850 Accts. Rec.—Jack Bowers $0 Ending credit balances: Allowance for Uncollectible Accounts $3,050 Problem 24-3 (1) Uncollectible Accounts Expense: Andrews Co. $2,800.02 The Book Nook $2,047.81 Cable Inc. $2,550.00 Davis Inc. $1,282.40 Ever-Sharp Co. $1,164.38 (2) Dec. 31: Dr. Uncollectible Accounts Expense $1,282.40; Cr. Allowance for Uncollectible Accounts $1,282.40

Chapter 25 Problem 25-1 Preparing Inventory Reports Total value of inventory $794.10 Problem 25-2 Determining Inventory Costs a. $472.55 b. $477.25 c. $465.25 d. $470.52 Problem 25-3 1. Ending inventory $575.90 2. Gross profit $214.30

Chapter 26 Problem 26-1 1. Interest $75.62, Maturity value $4,075.62 2. Interest $289.73, Maturity value $10,289.73 3. Interest $136.23, Maturity value $6,636.23 4. Interest $36.25, Maturity value $936.25 Problem 26-2 1. Interest $22.19 2. Interest $69.04 3. Interest $288.00 4. Interest $123.29 Problem 26-3 1. Cash in Bank $9,000 2. Notes Payable $9,000 3. Cash in Bank, asset; Notes Payable, liability 4. $9,355.07 Problem 26-4 1. Cash in Bank is debited for $9,802.74; Discount on Notes Payable is debited for $197.26; Notes Payable is credited for $10,000. 2. Discount $197.26, Proceeds $9,802.74

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–76

4/6/06 6:48:47 PM

Answers Problem 26-5 June 12: Dr. Cash in Bank $2,426.03, Discount on Notes Payable $73.97; Cr. Notes Payable $2,500; Note 55

Chapter 27 Problem 27-1 June 1: Dr. Cash in Bank $1,200, Accts. Rec. $2,000, Merchandise Inventory $8,000, Equiment $5,000, Van $12,000, Office Furniture $1,000; Cr. Matthew Deck, Capital $29,200; Memorandum 1 June 1: Dr. Cash in Bank $2,300, Accts. Rec. $7,000, Merchandise Inventory $5,000, Equipment $12,000, Office Furniture $500; Cr. Jennifer Rusk, Capital $26,800; Memorandum 1 Problem 27-2 1. 3/4, 1/4 2. 5/9, 3/9, 1/9 3. 3/8, 2/8, 2/8, 1/8 4. 2/4, 1/4, 1/4 5. 2/3, 1/3 Problem 27-3 Nov. 13: Dr. Cash in Bank $20,000; Cr. Walter, Capital $8,000, Yount, Capital $12,000

Chapter 28 Problem 28-1 Division of Net Income: Goldman $14,000 Jones $21,000 Partners’ Equity: Goldman $37,000 Jones $68,000 Problem 28-2 Shares of gain: Bass $7,200 Buie $7,200 Anderson $3,600 Norman $3,600 Dunham $2,400 Ruppe $2,400

APPE NDIX H

Problem 28-3 Sept. 4: Dr. Cash in Bank $38,000, Gunther, Capital $3,500, Pertee, Capital $3,500; Cr. Merchandise Inventory $45,000 Sept. 15: Dr. Cash in Bank $29,000; Cr. Gunther, Capital $1,000, Pertee, Capital $1,000, Office Equipment $27,000

Chapter 29 Problem 29-1 Weaknesses might include ethics programs that do not provide clear guidelines for action when faced with various situations. Some employees might not report violations out of fear of retribution. A business ethics plan that includes well-communicated methods for reporting violations (like a Web site, an ethics office, or ethics seminars) could help remedy this problem. Problem 29-2 The law covers most major ideas about the public’s definition of proper and improper behavior, but it does not offer guidance on every dilemma. Ethical concepts cover more subtle instances, where the proper course of action might not be so clear-cut. Use the following resources to find an example in which the actions of a business were legal but might be considered unethical: Business Week Online, The Wall Street Journal, local newspapers, and business magazines. Problem 29-3 The following behaviors are possible violations of principles of professional conduct. Marcus appears to be recording transactions in a misleading manner in order to increase the amount of profit reported for the business. This violates the accounting principle of integrity. Jennifer has not been appropriately trained and educated for accounting work. This violates the principle of competence. Ing’s behavior violates confidentiality when he shares confidential financial information with anyone not approved to receive it.

Appendix H Answers to Section Assessment Problems

A70-A77_AppH_868829.indd A–77

A–77

9/13/05 4:23:46 PM

GL O S S A R Y A account A subdivision under assets, liabilities, or owner’s equity that summarizes the changes and shows the balance for a specific item. accountant A person who handles a broad range of responsibilities, makes business decisions, and prepares and interprets financial reports. accounting clerk An entry-level job that can vary from specializing in one part of the system to doing a wide range of tasks. accounting cycle Activities performed in an accounting period that help the business keep its records in an orderly fashion. accounting equation The accounting relationship between assets and the two types of equities. Assets
liabilities  owner’s equity.

Glossary

accounting period The period of time covered by an accounting report. accounting system A system designed to collect, document, and report on business transactions. accounts payable The amount of money owed, or payable, to the creditors of a business. accounts payable subsidiary ledger A separate ledger that contains accounts for all creditors; it is summarized in the Accounts Payable controlling account in the general ledger. accounts receivable The amount of money owed to a business by its credit customers. accounts receivable subsidiary ledger A separate ledger that contains accounts for each charge customer; it is summarized in the Accounts Receivable controlling account in the general ledger. accrual basis of accounting A system that recognizes and records revenues and expenses when they are earned and incurred rather than when cash is collected and paid.

accumulated depreciation The total amount of depreciation for a plant asset that has been recorded up to a specific point in time. accumulated earnings The employee’s year-to-date gross earnings. adjusted gross income The total income for the year after adjustments on a federal income tax return. adjusting entries Journal entries that update the general ledger accounts at the end of a period. adjustment An amount that is added to or subtracted from an account balance to bring that balance up to date. administrative expenses Costs related to the management of a business (for example, office expenses). aging of accounts receivable method A method of estimating the uncollectible accounts expense in which each customer’s account is classified by age; the age classifications are multiplied by certain percentages; and the total estimated uncollectible amounts are added to determine the end-of-period balance of Allowance for Uncollectible Accounts. allowance method A procedure for uncollectible accounts receivable; the business matches the estimated uncollectible accounts expense with the sales made during the same period. assets Property or items of value owned by a business. audit The review of a company’s accounting systems and financial statements to confirm that they follow generally accepted accounting principles. authorized capital stock The maximum number of shares of stock a corporation may issue. automated teller machine (ATM) Computer terminal where account holders can conduct various banking activities.

B

accruals Transactions that have not yet been recorded in the accounts because a revenue has been earned but not yet received or an expense has been incurred but not yet paid.

balance sheet A report of the balances in the permanent accounts on a specific date.

accrued expense A business expense that has been incurred but not paid or recorded.

bank service charge A fee the bank charges for maintaining bank records and processing bank statement items for the depositor.

accrued revenue Business revenue that has been earned but not received or recorded.

G–1

bank discount The interest charge deducted in advance on a non-interest-bearing note payable.

bank statement An itemized record of all the transactions in a depositor’s account over a given period, usually a month.

Glossary

G1-G10_Glossary_868829.indd 1

9/19/05 7:28:42 PM

G L OSSARY bankcard A bank-issued card honored by many businesses that can be used to withdraw cash and to make payments for goods and services at many businesses instead of writing checks; also called a debit card, ATM card, or check card. bankcard fee A fee charged for handling bankcard sales slips; usually based on the total amounts recorded on the sales slips processed.

cash basis of accounting A system that recognizes and records revenue only when cash is received and expenses only when cash is paid out. cash discount The amount a customer can deduct from the total owed for purchased merchandise if payment is made within a certain time; also called sales discount. cash inflows Receipts of cash.

base period A period that is used for comparison in financial statements analysis.

cash outflows Payments of cash.

beginning inventory The merchandise a business has on hand at the beginning of a period.

cash payments journal A special journal used to record all transactions in which cash is paid out or decreased.

blank endorsement A check endorsement that includes only the signature or stamp of the depositor. It does not specify the new owner of the check.

cash receipt The cash received by a business in a single transaction.

board of directors A group of people, elected by the stockholders, who govern and are responsible for the affairs of a corporation. book value The original cost of a plant asset minus accumulated depreciation.

business entity The accounting assumption that a business exists independently of its owner’s personal holdings. The accounting records and reports are maintained separately and contain financial information related only to the business. business ethics The policies and practices that reflect a company’s core values such as honesty, trust, respect, and fairness. business transaction An economic event that causes a change—either an increase or a decrease—in assets, liabilities, or owner’s equity.

C calendar year Accounting period that begins on January 1 and ends on December 31. canceled check A check paid by the bank, deducted from the depositor’s account, and returned with the bank statement to the account holder. capital Money supplied by investors, banks, or owners of a business. Capital Stock The account that represents the total amount of investment in the corporation by its stockholders (owners).

cash sale A transaction in which the business receives full payment for the merchandise sold at the time of the sale. certified public accountant (CPA) A licensed professional who has met certain education and experience requirements and passed a national test. change fund An amount of money, consisting of varying denominations of bills and coins, that is used to make change in cash transactions. charge customer A customer to whom a sale on account is made. chart of accounts A list of all accounts used by a business. charter The legal permission, granted by a state, that gives a corporation certain rights and privileges and spells out the rules under which the corporation is to operate. check A written order from a depositor telling the bank to pay a stated amount of cash to the person or business named on the check. Check 21 The Check Clearing for the 21st Century Act; it allows the conversion of a paper check to an electronic image that can be quickly processed between banks. check stub A source document that lists the same information that appears on a check and shows the balance in the checking account before and after each check is written.

Glossary

G1-G10_Glossary_868829.indd 2

Glossary

book value of accounts receivable The amount the business can reasonably expect to collect from its accounts receivable.

cash receipts journal A special journal used to record all transactions in which cash is received.

G–2

9/19/05 7:28:44 PM

GL O S S A R Y checking account An account that allows a person or business to deposit cash in a bank and then write checks and make ATM withdrawals and purchases against the account balance. closely held corporation A corporation, often owned by a few people or by a family, that does not offer its stock for sale to the general public. closing entries Journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account. code of ethics A formal policy of rules and guidelines that describes the standards of conduct that a company expects from all its employees. combination journal A multicolumn journal that combines the features of the general journal and the special journals into one book of original entry.

Glossary

commission An amount paid to an employee based on a percentage of the employee’s sales. common stock The stock issued by a corporation when it issues only one class of stock. comparability Accounting characteristic that allows the financial information to be compared from one period to another period; also allows the comparison of financial information between businesses. competence The principle that requires accountants to have the knowledge, skills, and experience needed to complete a task. compound entry A journal entry with two or more debits or two or more credits. computerized accounting system A type of accounting system in which information is recorded by entering it into a computer. confidentiality The principle that requires accountants to protect and not disclose information acquired in the course of work unless they have the appropriate legal or professional responsibility to do so. conservatism principle Accounting principle requiring that when there is a choice, accountants choose the safer or more conservative method that is least likely to result in an overstatement of income or assets. consistency principle Accounting principle requiring a business to apply the same accounting methods in the same way from one period to the next.

G–3

contra account An account whose balance is a decrease to its related account. controlling account An account that serves as a control on the accuracy of the account balances in the subsidiary ledger; its balance must equal the total of all account balances in the subsidiary ledger. corporation A business organization recognized by law to have a life of its own. correcting entry An entry made to correct an error in a journal entry discovered after posting. cost of merchandise The actual cost to the business of the merchandise sold to customers. credit An agreement to pay for a purchase at a later time; an entry on the right side of an account. credit card A card, issued by a business and bearing a customer’s name and account number, which facilitates the sale on account. credit memorandum A form that lists the details of a sales return or sales allowance. credit terms Terms that state the time allowed for payment for a sale on account. creditor A business or person to whom money is owed. current assets The assets that are either used up or converted to cash during the normal operating cycle of the business. current liabilities The debts of the business that must be paid within the next accounting period. current ratio The relationship between current assets and current liabilities; calculated by dividing current assets by current liabilities.

D debit An entry on the left side of an account. debit memorandum The form a business uses to notify its suppliers (creditors) of a return or to request an allowance. deduction An amount that is subtracted from an employee’s gross earnings. deferrals Transactions that have been recorded in the accounts because cash has been received but not yet earned or cash has been paid but the expenses not yet incurred. deposit slip A bank form used to list the cash and checks to be deposited.

Glossary

G1-G10_Glossary_868829.indd 3

4/6/06 6:49:41 PM

G L OSSARY depositor A person or business that has cash on deposit in a bank. depreciation Allocating a plant asset’s cost over its useful life. direct deposit Depositing net pay directly into an employee’s personal bank account through electronic funds transfer. direct write-off method A procedure for uncollectible accounts receivable; the business removes the uncollectible account from its accounting records when it determines the amount is not going to be paid. discount period The period of time within which an invoice must be paid if a discount is to be taken. disposal value The estimated value of a plant asset at its replacement time; also called salvage value. dissolution A legal change to the partnership such as a change in partners that does not generally affect the operations of the business.

double-entry accounting A system that recognizes the different sides of business transactions as debits and credits.

entrepreneur A person who transforms ideas for products or services into real-world businesses. equities The total financial claims to the assets of a business. ethics The study of our notions of right and wrong; a set of basic principles. ethics officer The employee directly responsible for creating business conduct programs, evaluating performance, and enforcing standards of conduct. expense The cost of goods or services used to operate a business. external controls Measures and procedures provided outside the business to protect cash and other assets.

F face value The amount written on the face of a promissory note; also called principal. Federal Unemployment Tax Act (FUTA) Law that requires employers to pay unemployment taxes to the federal government.

drawee The bank on which a check is written.

financial accounting The type of accounting that focuses on reporting information to external users.

drawer The person who signs a check.

financial claim Legal right to an item.

due date The date by which an invoice must be paid.

financial reports Documents that present summarized information about the financial status of a business.

E e-file A system for filing tax returns with the IRS using a computer connected to the Internet. electronic badge reader An electronic device that scans the magnetic strip containing employee information on an employee’s identification badge and then transfers the information directly to a computer. Electronic Federal Tax Payment System (EFTPS) System used by large businesses to deposit income tax payments by electronic funds transfer. electronic funds transfer system (EFTS) A system that allows banks to transfer funds among accounts quickly and accurately without the exchange of checks. employee’s earnings record A record prepared for each employee that contains all payroll information related to the employee; it is kept on a quarterly basis. ending inventory The merchandise a business has on hand at the end of a period.

financial statements Reports prepared to summarize the changes resulting from business transactions that occur during an accounting period. financing activities Business activities involving debt and equity transactions. first-in, first-out method (FIFO) An inventory costing method that assumes that the first items purchased (first in) were the first items sold (first out). fiscal year An accounting period of twelve months. FOB destination Shipping term specifying that the supplier pays the shipping cost to the buyer’s destination. FOB shipping point Shipping term specifying that the buyer pays the shipping charge from the supplier’s shipping point. footing A column total written in small pencil figures. Glossary

G1-G10_Glossary_868829.indd 4

Glossary

dividend A distribution of cash to stockholders of a corporation; reduces the corporation’s retained earnings.

endorsement An authorized signature written or stamped on the back of a check that transfers ownership of the check.

G–4

9/19/05 7:28:44 PM

GL O S S A R Y Form 940 Form that reports the employer’s federal unemployment taxes.

gross earnings The total amount of money an employee earns in a pay period; also called gross pay.

Form 941 Employer’s Quarterly Federal Tax Return; form used to report accumulated amounts of FICA and federal income tax withheld from employees’ earnings for the quarter, as well as FICA tax owed by the employer.

gross profit on sales The amount of profit made during the fiscal period before expenses are deducted; it is found by subtracting the cost of merchandise sold from net sales.

home keys The 4, 5, 6 keys on a numeric keypad.

Form 1099 Form used by banks and other institutions to report interest earned on savings accounts and other income.

horizontal analysis The comparison of the same item(s) on financial statements for two or more accounting periods or dates; used to determine changes from one period to another.

Form 8109 Federal Deposit Tax Coupon; form sent with payment for FICA and federal income taxes or federal unemployment taxes. Form W-2 Wage and Tax Statement; form that summarizes an employee’s earnings and amounts withheld for federal, state, and local taxes.

Glossary

H

Form 1040EZ Federal income tax return; most students file this return.

Form W-3 Transmittal of Wage and Tax Statements; summarizes the information contained on the employees’ Forms W-2 and accompanies the Forms W-2 sent to the federal government. Form W-4 A form employees complete when they begin work; it indicates to the employer how much to withhold for federal income tax from each paycheck. for-profit business A business that operates to earn money for its owners. 401(k) plan A voluntary payroll deduction from gross earnings; the employee does not pay income tax on the amount contributed until the money is withdrawn from the plan, usually after age 59½. free enterprise system A system in which individuals are free to produce the goods and services they choose. full disclosure Accounting principle requiring a financial report to include enough information so that it is complete.

G

I imaged check A copy of a canceled check; it is sent with the bank statement in place of the original canceled check. income statement A report of the net income or net loss for a specific period; sometimes called a profit-and-loss statement or earnings statement. Income Summary account The general ledger account used to summarize the revenue and expenses for the period. independence The principle that requires accountants to have no financial interest in the company being audited. integrity The principle that requires accountants to choose what is right and just over what is wrong. interest The fee charged for the use of money. interest rate The fee charged for the use of money stated as a percentage of the principal. interest-bearing note payable A note that requires the face value plus interest to be paid on the maturity date. internal controls Procedures within the business that are designed to protect cash and other assets and to keep reliable records.

general journal An all-purpose journal in which all the transactions of a business may be recorded.

inventory The items of merchandise a business has in stock.

general ledger A permanent record organized by account number.

investing activities Business activities involving investments and plant assets.

generally accepted accounting principles (GAAP) The set of rules that all accountants use to prepare financial reports.

investment Money or other property provided for the purpose of making a profit.

going concern The accounting assumption that a business is expected to operate indefinitely.

G–5

invoice A source document that lists the quantity, description, unit price, and total cost of the items sold and shipped to a buyer.

Glossary

G1-G10_Glossary_868829.indd 5

9/19/05 7:28:45 PM

G L OSSARY issue date The date on which a promissory note is written.

J journal A chronological record of the transactions of a business. journalizing The process of recording business transactions in a journal.

L last-in, first-out method (LIFO) An inventory costing method that assumes that the last items purchased (last in) are the first items sold (first out). ledger A group of accounts; also referred to as a general ledger. ledger account form The accounting stationery used to record financial information about specific accounts. liabilities Amounts owed to creditors; the claims of creditors to the assets of a business.

liquidation When the business ceases to exist and dissolution is complete, all partnership assets are converted to cash, all debts are paid, and any remaining cash is distributed to the individual partners. liquidity ratio The measure of a business’s ability to pay its current debts as they become due and to provide for an unexpected need for cash. long-term liabilities Debts that are not required to be paid within the next accounting period. loss The result when a business spends more money than it earns. lower-of-cost-or-market The requirement that ending merchandise inventory be stated at the lesser of cost (calculated using one of the four inventory costing methods) or market value.

M maker The person or business promising to repay the principal and interest when a loan is made. management accounting The type of accounting that focuses on reporting information to management; often referred to as accounting for internal users of accounting information. manual accounting system A type of accounting system in which information is processed by hand.

market value The current price that is charged for a similar item of merchandise in the market. matching principle Principle requiring that the expenses incurred in an accounting period are matched with revenue earned in the same period. materiality An accounting guideline stating that information considered important (relative to the other information) should be included in financial reports. maturity date The due date of a promissory note; the date on which the principal and interest must be paid. maturity value The principal plus interest that must be paid on a promissory note’s due date. memorandum A brief written message that describes a transaction that takes place within a business. merchandise Goods bought to resell to customers. merchandising business A business that buys finished goods and resells them to individuals or other businesses. mutual agency The legal right of any partner to enter into agreements for the business that are binding on all other partners.

Glossary

lifestyle The way a person uses time, energy, and resources.

manufacturing business A business that buys raw materials and transforms them into finished products by using labor and machinery.

N net income The amount by which total revenue exceeds total expenses for the accounting period. net loss The amount by which total expenses exceed total revenue for the accounting period. net pay The amount left after total deductions have been subtracted from gross earnings. net purchases The total cost of all merchandise purchased during a period, less any purchases discounts, returns, and allowances. net sales The amount of sales for the period less any sales discounts, returns, and allowances. networking Making contacts with people to share information and advice. non-interest-bearing note payable A note from which the interest is deducted in advance from the face value of the note; no interest rate is stated on the note. normal balance The increase side of an account. The word normal here means usual. note payable A promissory note issued to a creditor. Glossary

G1-G10_Glossary_868829.indd 6

G–6

4/6/06 6:49:42 PM

GL O S S A R Y note receivable A promissory note that a business accepts from a customer. not-for-profit organization An organization that operates for purposes other than making a profit. NSF check A check returned to the depositor by the bank because the drawer’s checking account does not have sufficient funds to cover the amount; also called dishonored check.

O

Glossary

objectivity The principle that requires accountants to be impartial, honest, and free of conflicts of interest.

par value The dollar amount assigned to each share of stock before it is sold to the public; used to determine the amount credited to the capital stock account. partnership A business owned by two or more persons, called partners, who agree to operate the business as co-owners. partnership agreement A written agreement that states the terms under which the partnership will operate. pay period The amount of time over which an employee is paid.

on account The purchase of an item on credit.

payee The person or business to whom a check is written or a note is payable.

online The link of a terminal or cash register to a centralized computer system.

payroll A list of the employees and the payments due to each employee for a specific pay period.

operating activities Business activities involving normal business operations.

payroll clerk An employee responsible for preparing the payroll.

operating expenses The cash spent or assets consumed to earn revenue for a business; operating expenses do not include federal income tax expense.

payroll register A form that summarizes information about employees’ earnings for each pay period.

operating income The excess of gross profit over operating expenses; taxable income.

Payroll Tax Expense The expense account used to record the employer’s payroll taxes (FICA, FUTA, SUTA).

other expense A nonoperating expense; an expense that does not result from the normal operations of the business.

percentage of net sales method A method of estimating uncollectible accounts expense in which a business assumes that a certain percentage of each year’s net sales will be uncollectible.

other revenue Nonoperating revenue that a business receives from activities other than its normal operations.

periodic inventory system An inventory system which requires a physical count of the merchandise on hand to update inventory records.

outstanding check A check that has been written but has not yet been presented to the bank for payment.

permanent accounts Accounts that are continuous from one accounting period to the next; balances are carried forward to the next period (for example, assets, liabilities, and the owner’s capital account).

outstanding deposit A deposit that has been made and recorded in the checkbook but does not yet appear on the bank statement. overtime rate Pay rate employers are required to pay certain employees covered by state and federal laws; the Fair Labor Standards Act of 1938 sets the rate at 1½ times the regular hourly rate after 40 hours per week. owner’s equity The owner’s claims to the assets of the business.

P packing slip A form that lists the items included in the shipment. Paid-in Capital in Excess of Par The account that represents the amount of cash received by a corporation over the stock’s par value.

G–7

perpetual inventory system An inventory system that keeps a constant, up-to-date record of the amount of merchandise on hand. personal interest tests Tests that help individuals to identify their preferences and to match interests to potential careers. personality A set of unique qualities that makes a person different from all other people. petty cash disbursement Any payment made from the petty cash fund. petty cash fund Cash kept on hand for making small, incidental cash payments. petty cash register A record of all disbursements made from the petty cash fund.

Glossary

G1-G10_Glossary_868829.indd 7

9/19/05 7:28:46 PM

G L OSSARY petty cash requisition A form requesting money to replenish the petty cash fund. petty cash voucher A form that provides proof of payment from the petty cash fund. petty cashier The person responsible for maintaining the petty cash fund and for making petty cash disbursements. physical inventory An actual count of all merchandise on hand and available for sale. piece rate A rate of pay based on the number of items produced. plant assets Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. point-of-sale terminal (POS) An electronic cash register. post-closing trial balance A list of the permanent general ledger account balances; it is prepared to prove the ledger after the closing entries are posted.

posting The process of transferring information from the journal to individual general ledger accounts. preferred stock Stock whose owners have certain privileges over common stockholders. premium The amount paid for insurance. prepaid expense An expense paid in advance. principal The amount of money borrowed on a promissory note. proceeds The cash actually received by the borrower on a non-interest-bearing note payable. processing stamp A stamp placed on a creditor’s invoice that outlines the steps to be followed in processing the invoice for payment. profit The amount earned above the amount of expense incurred to keep the business operating. profitability ratio A ratio used to evaluate the earnings performance of a business during the accounting period. promissory note A written promise to pay a certain amount of money at a specific time. property Anything of value that a business or person owns and therefore controls.

proving the ledger Adding all debit balances and all credit balances of ledger accounts, and then comparing the two totals to see whether they are equal. proxy A document that transfers a stockholder’s voting rights to someone else. public accounting firm A business that provides a variety of accounting services including the independent audit. publicly held corporation A corporation whose stock is widely held, has a large market, and is usually traded on a stock exchange. purchase order A written offer to a supplier to buy specified items. purchase requisition A written request that a specified item or items be ordered. Purchases account The account used to record the cost of merchandise purchased during a period. purchases allowance A price reduction given when a business keeps unsatisfactory merchandise it has bought. purchases discount The buyer’s cash discount for early payment of an invoice on account. purchases journal A special journal used to record all transactions in which items are bought on account. purchases return The return of merchandise bought on account to the supplier for full credit.

Q quick ratio A measure of the relationship between short-term assets and current liabilities; calculated by dividing the total cash and receivables by the current liabilities.

R ratio analysis The process of evaluating the relationship between various amounts in the financial statements. receipt A source document that serves as a record of cash received. reconciling the bank statement The process of determining any differences between a bank statement balance and a checkbook balance.

Glossary

G1-G10_Glossary_868829.indd 8

Glossary

postdated check A check that has a future date instead of the actual date; it should not be deposited until the date on the check.

proving cash The process of verifying that cash recorded in the accounting records agrees with the amount entered in the checkbook.

G–8

9/19/05 7:28:46 PM

GL O S S A R Y relevance An accounting characteristic requiring that all information that would affect the decisions of financial statement users be disclosed in the financial reports. reliability A characteristic requiring that accounting information be reasonably free of bias and error. report form A balance sheet format that lists classifications one under another. restrictive endorsement A check endorsement that transfers ownership to a specific owner and limits how the check may be handled (for example, For Deposit Only). retailer A business that sells to the final user, the consumer. retained earnings A corporation’s accumulated net income that is not distributed to stockholders.

Glossary

return on sales A ratio that examines the portion of each sales dollar that represents profit; calculated by dividing net income by sales. revenue Income earned from the sale of goods and services. revenue recognition The GAAP principle that revenue is recorded on the date it is earned even if cash has not been received. reversing entry An optional general journal entry recorded on the first day of the new period that is the exact opposite of a specific adjusting entry made in the previous period; it simplifies the recordkeeping in the new period. ruling Drawing a line; a single rule (line) drawn under a column of figures indicates that the entries above the rule are to be added or subtracted. If an amount is a total and no further processing is needed, a double rule is drawn under it.

S Salaries Expense The expense account used to record employees’ earnings. salary A fixed amount of money paid to an employee for each pay period. sale on account The sale of merchandise that will be paid for at a later date. Sales A revenue account to record the amount of the merchandise sold. sales allowance A price reduction granted for damaged goods kept by the customer.

sales journal A special journal used to record only the sale of merchandise on account. sales return Any merchandise returned for credit or a cash refund. sales slip A form that lists the details of a sale. sales tax A tax levied by a city or state on the retail sale of goods and services. schedule of accounts payable A list of all creditors in the accounts payable ledger, the balance in each account, and the total amount owed to all creditors. schedule of accounts receivable A list of each charge customer, the balance in the customer’s account, and the total amount due from all customers. selling expenses Expenses a business incurs to sell or market its merchandise or services. service business A business that provides a needed service for a fee. signature card A bank form containing the signature(s) of the person(s) authorized to write checks on a checking account. skills The activities that a person does well. slide error Error that occurs when a decimal point is moved by mistake. sole proprietorship A business owned by one person. source document A paper prepared as evidence that a transaction occurred. special endorsement A check endorsement that transfers ownership of the check to a specific individual or business. special journals Journals that have amount columns for recording debits and credits to specific general ledger accounts. specific identification method An inventory costing method in which the exact cost of each item in inventory is determined and assigned; used most often by businesses that have a low unit volume of merchandise with high unit prices. State Unemployment Tax Act (SUTA) Law that requires employers to pay unemployment taxes to individual states. statement of cash flows A financial statement that summarizes the cash receipts and cash payments resulting from business activities during a period.

sales discount See cash discount.

G–9

Glossary

G1-G10_Glossary_868829.indd 9

9/19/05 7:28:47 PM

G L OSSARY statement of changes in owner’s equity A financial statement that summarizes changes in the owner’s capital account as a result of business transactions during the period.

trial balance A list of all the general ledger account names and balances; it is prepared to prove the ledger.

statement of changes in partners’ equity A financial statement that reports the change in each partner’s capital account resulting from business operations, investments, and withdrawals.

uncollectible account An account receivable that the business cannot collect; also called a bad debt.

statement of retained earnings A financial statement that reports the changes in the Retained Earnings account during the period.

unemployment taxes Taxes collected to provide funds for workers who are temporarily out of work; usually paid only by the employer (FUTA and SUTA).

statement of stockholders’ equity A financial statement that reports the changes that have taken place in all of the stockholders’ equity accounts during the period. stockholders’ equity The value of the stockholders’ claims to the corporation. stop payment order A demand by the drawer, usually in writing, that the bank not honor a specific check.

subsidiary ledger A ledger with detailed data that is summarized in a controlling account in the general ledger.

unearned revenue Revenue that is received before it is actually earned.

V values The principles a person lives by and the beliefs that are important to the person. vertical analysis A method of analysis that expresses financial statement items as percentages of a base amount. voiding a check Making a check unusable by writing the word Void in ink across the front of the check. voluntary compliance The principle that all taxpayers are responsible for filing their tax returns accurately and on time.

Glossary

straight-line depreciation A method that equally distributes the depreciation expense over an asset’s estimated useful life.

U

W

T

wage An amount of money paid to an employee at a specified rate per hour worked.

T account A visual representation of a ledger account. The T account is a tool used to analyze transactions.

weighted average cost method An inventory costing method in which all purchases of an item are added to the beginning inventory of that item; the total cost is then divided by the total units to obtain the average cost per unit.

taxable income The amount of income that is taxed on a federal income tax return. temporary accounts Accounts used to collect information that will be transferred to a permanent capital account at the end of the accounting period (for example, revenue, expense, and the owner’s withdrawals account). term The length of time the borrower has to repay a promissory note. tickler file A file that contains a folder for each day of the month into which invoices are placed according to their due dates. time card A record of the time an employee arrives at work, leaves work, and the total number of hours worked each day.

wholesaler A business that sells to retailers. withdrawal The removal of cash or another asset from the business by the owner for personal use. withholding allowance An allowance an individual claims on a Form W-4; it is used to calculate the amount of income tax withheld from an employee’s paycheck. work sheet A working paper used to collect information from the ledger accounts for use in completing end-of-period activities. working capital The amount by which current assets exceed current liabilities.

transposition error Error that occurs when two digits within an amount are accidentally reversed, or transposed. Glossary

G1-G10_Glossary_868829.indd 10

G–10

9/19/05 7:28:47 PM

I N D EX A

Index

A ABA (American Bankers Association) number, 279 account, 54. See also specific accounts cash received on, 396–397 contra, 389 controlling, 386 determining balance of, 80 four-column form, 165 normal balance of, 80 number, 78 opening an, 165–166 payment on, 431–432 purchase on, 421–424 sale on, 381 subsidiary, 385 T, 79, 83–84 temporary, 104–105, 106–109 uncollectible, 698–699 zero balance, 174 account name section on work sheet, 198 accountant, 13. See also careers accounting, 50 basic concepts, 50–52, 78–81, 104–109 basic terminology, 50–52, 78–81, 104–109 careers in, 13–15, 17, 37, 89, 117, 176, 230, 293, 361, 428, 503, 623, 685 financial, 34 management, 34–35 payroll, 308 purpose of, 13, 40 reports, 34 system, 33 accounting clerk, 14 accounting cycle, 132–134, 164, A-8 analyze business transactions, 55, 134 collecting source documents, 133 for merchandising business, 598 journalizing adjusting entries, 136, 520–521, 534 journalizing business transactions, 136–137 journalizing closing entries, 250–252 posting, 168–170 posting closing entries to general ledger, 260–261 preparing a post-closing trial balance, 262 preparing a trial balance, 177–180 preparing financial statements, 220 preparing the work sheet, 197–199 steps in, 132 accounting equation, 52, 55 effects of transactions on, 55, 81 accounting period, 35, 134 at end of the, 250 closing the, 267 accounting system, 33

I–1

accounts chart of, 78, 79 classifying, 54–55 opening, 165–166 permanent, 105–106 temporary capital, 104, 105, 106–109 accounts payable, 55 accounts payable subsidiary ledger, 421 posting to the, 426 accounts payable subsidiary ledger form, 421, 422 accounts receivable, 54, 385 aging of, 713–714 book value of, 706 collecting a written-off account, 700, 709 uncollectible, 719 accounts receivable subsidiary ledger, 385–386 posting to the, 389, 391 proving, 466, 468 accrual basis of accounting, A-26 accruals, A-26 accrued expenses, A-28 accrued revenue, A-27 accumulated depreciation, 675 account for, 678–679, 680, 681 accumulated earnings, 323 adjusted gross income, A-37 adjusting entries, 531 for depreciation expense, 677–680 in computerized accounting, 541 updating accounts through, 534, A-2, A-7, A-10 adjustments, 520, A-2. See also adjusting entries calculating, 519, A-3–A-6 in ten-column work sheet, 518–522, A-4–A-7 recording, 531–532, A-7, A-10 to Merchandise Inventory, 521–522 to Prepaid Insurance, 525–527, A-5 to Supplies, 524–525, A-3 to tax accounts, 527 administrative expenses, 561 aging of accounts receivable method, 713–714 allowance method, 704 American Institute of Certified Public Accountants (AICPA), 838 analysis horizontal, 568 ratio, 235–236 vertical, 563, 695 annual report, 447, 479 asset and equities transactions, 83–84 assets, 51, 80 current, 235, 670 plant, 671, 672, 695 assets and liabilities, 85–87 assets and owner’s capital, 84–85

Index A

I01-I10_IN-A-868829.indd 1

9/19/05 5:54:46 PM

INDE X A assets section of balance sheet, 232 audit, 15 authorized capital stock, 615 automated teller machine (ATM), 291

B

C calendar year, 134 canceled checks, 285 capital, 29 capital account, 104 capital investments division of profits and losses, 793–794 Capital Stock, 552, 553 authorized, 615 common, 615 issuing, 616 par value, 615 preferred, 615, 617 careers choosing, 6–9 in accounting, 13–15, 17, 37, 89, 117, 176, 230, 293, 361, 428, 503, 623, 685 researching, 10–11 setting goals for, 11 cash proving, 284, 500, 501 cash basis of accounting, A-26 cash discount, 394–395 recording cash received on account with, 396–397 cash flows, 569-570 cash funds, 659 cash inflows, 569 cash outflows, 569 cash payment and purchases, 439, 507 controls, 429 for account purchases, 431, 432 other, 432 transactions, 56 cash payments journal, 489, 497–498 posting from, 494–497, 498, 499 proving, 499, 500, 501 recording in, 490–492, 493–494 recording payroll in, 492, 493 cash proof, 500, 501 for change fund, 643 cash purchases recording, 429, 430 Index A

I01-I10_IN-A-868829.indd 2

Index

bad debts, 698. See also uncollectible accounts receivable balance sheet, 231–234, 566–567, 625–626 analysis of, 231, 568–570 and ratio analysis, 235 assets section, 232 classifying, 549 for corporation, 566–567 for partnership, 809 heading, 231–232 liabilities and owner’s equity section, 232–234 of ten-column work sheet, 532 of a work sheet, 201, 203 proving the, 234 bank discount, 759 bank service charges, 286 journalizing, 288 bank statement, 284–285 reconciling, 285–286, 297 bankcard, 291, 394 bankcard fees, 433 bankcard sales, 394 recording, 399 banking procedures, 288–289 endorsing checks, 280–281 opening a checking account, 279 preparing commercial bank deposits, 279–280 protecting cash, 278 recording deposits, 281 writing checks, 281–282 base period, 568 beginning inventory, 521 blank endorsement, 281 board of directors, 615 book of original entry, 134 book value, 675 of accounts receivable, 706 of notes payable, 757 of plant assets, 672 bookkeeper, 78 business, 28–29 decisions, 34–35 for-profit, 13–14 not-for-profit, 14–15 operations, 29 organizations, 29–31 business entity, 35

business ethics, 832 business organizations, forms of, 29–31 business transactions, 54 analysis of, 83, 84–87, 111–115 cash payment, 56 credit, 57–58 double-entry accounting, 78–81 revenue and expense, 60–61 source documents for, 133 withdrawals, 61–62

I–2

9/19/05 5:54:48 PM

Index

I N D EX A cash receipt, 393 and sales, 405, 473 journalizing and posting, 395–400, 459 transactions, 393–394 cash receipts journal, 459, 464 posting, 459–460, 463–464, 465–467 proving, 464–465 recording in, 460–462 cash received on account, 396–397 cash refunds, 389 cash register, 393 cash register tape as source document, 643 cash sale, 393 recording, 398 cash short and over, 644–645 in petty cash fund, 653–654 certified public accountant (CPA), 15 change fund, 642–643 charge customers, 384 payments, 393, 395–396 chart of accounts, 78 for a merchandising corporation, 381 for a sole proprietorship service business, 79 preparing, 78, 121 charter, 31 Check 21, 289 checkbook, 279 checking account, 278 making deposits to, 279–281 opening, 279 recording deposits to, 281 check-less system, 290 checks, 278 canceled, 285 endorsing, 280–281 filling out, 282 imaged, 285 NSF, 289 payroll, 322 routing of, 291 stub, 133, 281–282 voiding, 282 writing, 281–282 closely held corporations, 614. See also corporations, publicly held corporations closing entries, 250, 253 for depreciation expense, 681, 682, 683 for expenses, 255–256 for revenue, 254–255 for temporary accounts, 253–258 for withdrawals, 257–258 journalizing, 250–252, 588–591 updating accounts through, 260–262 closing process, 251–252

I–3

closing the accounting period, 267 closing the fiscal year, 603 closing the general ledger, 588–591, 593–597 code of ethics, 833 collecting and verifying source documents, 133–134 combination journal, A-18 commission, 313 common stock, 615 dividends, 619–621 issuing, 616 comparability, 554–555 comparative income statement, 563 competence, 837 compound entry, 256 computerized accounting system, 33, 93, 421 adjusting entries, 541 closing accounting period, 267 closing fiscal year, 603 customizing financial statements, 631 electronic spreadsheets, 67 financial statements, 555 general journal entries, 153 inventory costing, 743 maintaining cash funds, 659 payroll and, 323, 324 posting to the general ledger, 185 preparing a trial balance, 211 preparing financial statements, 241, 575 preparing payroll, 329 purchases and cash payments in, 507 receipts, 405 reconciling bank statements, 297 recording and paying payroll taxes, 365 recording depreciation, 689 recording general journal entries, 153 recording notes receivable and payable, 771 recording purchases and cash payments, 439 recording sales and cash receipts, 405 sales and cash receipts in, 473 setting up the general ledger, 121, 771 starting new company, 799 writing-off uncollectible accounts receivable, 719 confidentiality, 837 conservatism principle, 738 consistency principle, 737 contra account, 389 contra asset, 678, 704 contra cost of merchandise, 425 controlling account, 386, 421 corporation, 30, 31. See also publicly held corporations accounting functions involved with a, 527, 552–554, 588–591, 616, 617, 619–621 characteristics of, 614–615 recording ownership for, 552

Index A

I01-I10_IN-A-868829.indd 3

9/19/05 5:54:48 PM

INDE X A correcting entry, 179 correcting errors in journal entries, 148 in trial balance, 179–180 cost of merchandise, 419 cost of merchandise sold, 558 CPA (certified public accountant), 15 credit, 51, 79 equality with debits, 115 purchasing on, 51 credit balance column, 165 credit cards, 384 credit memorandum, 388–389 credit terms, 385 credit transactions, 57 creditor, 51 current assets, 235, 670 current liabilities, 235 current ratio, 236

D

E e-file, A-38 EFTPS (Electronic Federal Tax Payment System), 351 EFTS (Electronic Funds Transfer System), 290 electronic badge readers, 312 electronic funds withdrawal, A-39 electronic spreadsheets, 67 employees paying, 322–323 employee’s earnings record, 323–324 employer’s payroll taxes, 346–347 journalizing, 347–348 posting to general ledger, 349 quarterly report, 358, 359 ending inventory, 521 adjustment for, 521, 522 determining cost of, 731 end-of-period reports, 518 endorsement, 280–281 entrepreneurs, 27, 28, 29 traits of, 29, 30, 31 entries, adjusting, 541 closing, 250 equality of debits and credits, 115 equities, 51, 52 statement of stockholders’, 624–625 stockholders’, 552–553, 614, 637 transactions, 83–84 errors correcting, 148, 179–180 erasing an error, 179–180 finding, 115, 178–179 in a cash proof, 501 in balance sheet section, 205 in checkbook, 284 in subsidiary ledger, 466, 468 preventing in payroll, 323, 324 slide, 178 transposition, 178 when reconciling bank statement, 287 when writing checks, 282 estimated useful life, of plant asset, 671–672 Index A

I01-I10_IN-A-868829.indd 4

Index

debit, 79 equality with credits, 115 rules of, 79, 80 debit balance column, 165 debit-credit rule, 79–81, 83 debit memorandum, 424 declining-balance depreciation, 675 deductions, payroll, 315, 340–341 required, 315–316 voluntary, 318, 355 deferrals, A-30 deposit slip, 279, 280 deposit ticket, 279, 280 depositor, 278 depreciation, 671 accumulated, 675, 678–679, 680–681 ACRS, 672 adjusting entries for, 681, 683 adjusting for depreciation expense, 677–680 calculating, 671, 674–675 closing entries for, 681, 683 MACRS, 672 of plant assets, 671, 672 rate, 674–675 recording, 682, 689 reporting on financial statements, 679–680 schedule, 675, 677 summary of, 677 direct deposit, 290, 323 direct write-off method, 698 disclosure, full, 555 discount period, 419 disposal value, 672, 675

dissolution, 811 dividends, 619–621 division of profits and losses, 790 capital investment, 793–794 equal, 790 fractional share, 791–793 double-entry accounting, 79, 115 double rule, 199, 232 drawee, 282 drawer, 282 due date, 422

I–4

9/19/05 5:54:49 PM

I N D EX A ethics, 832 in accounting, 24, 44, 74, 100, 128, 190, 216, 246, 274, 302, 336, 370, 412, 446, 478, 514, 548, 580, 610, 636, 666, 694, 724, 748, 776, 804, 824, 845 ethics officer, 833 expense, 60, 104 accrued, A-28 depreciation, 677, 679 operating, 561 prepaid, A-31 section of income statement, 223 section on worksheet, 223 uncollectible, 703 expense accounts, 104, 107–108 closing, 255–256 external controls, 278

Index

F face value of note, 752 federal income tax EFTPS, 351 paying, 351, 353 payroll deductions for, 315–318 Federal Insurance Contributions Act (FICA), 316 employer’s, 346–347 Federal Tax Deposit Coupon, 351, 354 Federal Unemployment Tax Act (FUTA), 347, 353–354 FICA (Federal Insurance Contributions Act), 316 employee’s, 318 employer’s, 346–347 FIFO (first-in, first-out), 732–733 financial accounting, 34 Financial Accounting Standards Board (FASB), 33 financial claim, 50, 51, 52 financial reports, 33 financial statements, 78, 220. See also specific financial statements analyzing, 247, 275, 303, 337, 413, 447, 479, 549, 581, 611, 637, 667, 695, 725, 749, 777, 805, 825 balance sheet, 231–234, 566-567, 625-626 customizing, 631 end-of-period, 554 income statement, 221–223, 557 preparing computerized, 241, 575 preparing manual, 221, 557 recording depreciation on, 680–681 statement of cash flows, 234, 569–570, 626 statement of changes in owner’s equity, 225–228 statement of changes in partner’s equity, 809 statement of retained earnings, 565–566 financing activities, 570 finding errors. See also errors in trial balance, 115, 178–179 first-in, first-out method (FIFO), 732

I–5

fiscal year (period), 134 closing the, 603 FOB destination, 433 FOB shipping point, 433 footing, 453 Form 940, 358 Form 941, 358, 359 Form 1040EZ, A-37 Form 1099, A-37 Form 8109, 351–352 Form W-2, 357, 358, A-37–A-38 Form W-3, 357, 358 Form W-4, 315–316, A-37 for-profit business, 14 four-column ledger account form, 165 401 (k) plan, 318 fractional share basis, 791–793 free enterprise system, 28 full disclosure, 555 FUTA (Federal Unemployment Tax Act), 347, 353–354

G GAAP (generally accepted accounting principles), 33 accounting period, 35 business entity, 35 conservatism, 738 consistency, 737 going concern, 35 matching, 203, 557, 670, 703 revenue recognition, 113, 386 general journal, 136 adjusting entries in, 531, A-7 closing entries in, 250 correcting errors in, 148 recording entries in, 136–140 general ledger, 164 closing, 588–591, 593–597 posting closing entries to the, 260–261 posting payroll to the, 343–344 setting up the, 164–165, 185, 819 generally accepted accounting principles. See GAAP going concern, 35 gross earnings, 311 gross pay. See gross earnings gross profit on sales, 561

H heading on balance sheet, 231–232 on financial statements, 221, 225 work sheet, 196 home keys, A-14 horizontal analysis, 568, 725 hourly wage, 312

Index A

I01-I10_IN-A-868829.indd 5

9/19/05 5:54:49 PM

INDE X A I

journalizing, 134 cash payments, 489, 497–498 cash receipts, 459, 464 closing entries, 253–258, 588–591 correcting entries, 179 employer’s payroll taxes, 347–348 payroll, 340–343 purchases, 482–483, 485, 486 sales, 450, 451, 453, 454 work sheet adjustments, 531 journals, 134. See also specific journals closing entries in, 558–591 special, 450 usefulness of, 166

K keeping the books, 78

L last-in, first-out (LIFO) method, 733 ledger, 78. See also specific ledgers ledger, general. See general ledger ledger account form, 165 ledger accounts opening, 165–166 ledgers usefulness of, 166 liabilities, 52 assets and, 85–87 current, 235 long term, 757 payroll, 340–341 rules of debit and credit, 79–81 liabilities section on balance sheet, 232–234 liability accounts, 80–81 lifestyle, 9 LIFO (last-in, first-out), 733–734 liquidation, 811–814 liquidity ratio, 236 local taxes, 318, 352–353 long-term liabilities, 757 loss, 28 lower-of-cost-or-market method, inventory valuation, 738

M maker, 752 management and payroll accounting, 324 use of income statements, 563 use of journals and ledgers, 166 use of work sheet, 203 Index A

I01-I10_IN-A-868829.indd 6

Index

imaged checks, 285 income statement, 220, 221, 557 analysis of, 562–563, 695 cost of merchandise sold, 558, 559, 560 expenses section, 223 gross profit on sales, 561 net income section, 223, 561–562 operating expenses, 561 revenue section, 221, 558 section of a work sheet, 201, 203 Income Summary account, 253 closing entries to, 353–356 closing to capital, 256–258 independence, 837 Institute of Internal Auditors (IIA), 830, 838 Institute of Management Accountants (IMA), 838 insurance prepaid, 429 recording payment of, 429, 430 integrity, 836 interest, 754 calculating on a note, 754, A-26, A-28 payable, A-28 receivable, A-27 interest-bearing notes payable, 757 interest rate, 752 interest table, 755 interests, personal, 8 internal controls, 278, 324, 729 Internal Revenue Service (IRS), 315, 357, 672, A-36, A38, A-40 inventory, 382 beginning, 521 ending, 521 merchandise, 521, 522 methods of tracking, 728–729 physical, 729 recording, 729 sheet, 729 inventory costing, 743 consistency and, 737 FIFO, 732–733 LIFO, 733–734 specific identification, 731–732 weighted average cost, 734 investing activities, 569 investment, 55 invoice, 133 processing supplier’s, 418 issue date, 752

J

I–6

9/19/05 5:54:49 PM

I N D EX A

Index

management accounting, 34 manual accounting system, 33, 78, 422 accounts receivable subsidiary ledger in a, 386 general ledger in a, 164 manufacturing business, 29 market value, 738 matching principle, 203, 557, 670, 703 materiality, 555 maturity date, 752 maturity value, 755 memorandum, 133 credit, 388–389 debit, 424 merchandise, 382 cost of, 419 purchase of, 416–425, 429, 430 sale of, 380–389, 398 merchandise inventory, 382, 521, 522, 728 merchandising business, 29, 380 contrasting with a service business, 380 operating cycle, 380, 382 sales, 382 MICR number, on check, 279 mutual agency, 787

N net income, 203 closing entry for, 588 division of, for partnership, 790–794 on a work sheet, 223 on an income statement, 203, 204 net loss, 206 at closing, 256–257, 591 on a work sheet, 206 on an income statement, 223 net pay, 321 net purchases, 559 net sales, 558 networking, 11 non-interest-bearing notes payable, 759 nonprofit. See not-for-profit organization normal balance, 80 note payable, 752 interest-bearing, 757–759 non-interest-bearing, 759–763 note receivable, 752, 765–766. See also promissory notes not-for-profit organization, 14 NSF checks, 289 numeric keypad, A-14

O objectivity, 837 on account, 57 cash received, 396–397

I–7

online, 729 opening a checking account, 279 operating activities, 569 operating cycle for merchandising business, 380, 382 operating expenses, 561 operating income, 561 other expense, 763 other revenue, 765 outstanding checks, 286 outstanding deposits, 286 overtime rate, 313 owner’s capital accounts, 80–81 owner’s capital and assets, 84–85 owner’s equity, 52 return on, 275 owner’s equity section on balance sheet, 234 owner withdrawals, 61–62

P packing slip, 418 Paid-in Capital in Excess of Par, 616 par value, 615 partners’ equity, 787, 788, 803 statement of changes to, 809 partnership, 30, 31 accounting functions involved with a, 787–794 agreement, 786 analysis of a, 825 characteristics of a, 786–787 dissolution of, 811 division of profits and losses, 790–794 financial statements for, 808–809 liquidation of, 811–814 pay period, 310 payee, 281, 752 paying employees, 322–323 payroll, 310 accounting, 324 deductions, 315–318, 340–341 employee-paid withholdings. See deductions employee’s earnings record, 323–324 employer’s taxes, 346–347 funds, dissemination of, 322–323 gross pay, 311 journalizing, 340–343, 492–493 managerial importance of, 324 net pay, 321 posting to general ledger, 343–344 preparing computerized, 329 registers, 320–322, 341 salary expenses, 311 payroll clerk, 310 payroll liabilities, 340–341 posting to, 356–357

Index A

I01-I10_IN-A-868829.indd 7

9/19/05 5:54:50 PM

INDE X A processing stamp, 418 profit, 28 profitability ratios, 235 promissory notes, 752. See also notes payable; notes receivable bank discount, 759 calculating interest on, 754–755 determining maturity date of, 753–754 property, 50 proprietorship. See sole proprietorship protecting cash, 278 proving cash, 284, 500, 501 proving equality of balance sheet, 234 proving the ledger, 177 proxy, 615 public accounting firm, 15 publicly held corporations, 614 dividends, 619–621 financial reporting for, 624–626 stock, 615–617 purchase allowance, 424–425 purchase discounts, 418, 419 purchase order, 416 purchase requisition, 416 Purchases account, 419 purchases allowance, 424 purchases and cash payments, 439, 507 purchases journal, 482–483, 485, 486 posting from the purchases journal, 484, 485 posting special column totals to general ledger, 487 recording and journalizing purchases on account, 483 purchases on account accounts payable subsidiary ledger, 421 posting to accounts payable subsidiary ledger, 426 recording purchases on, 422–424, 431, 432, 483–484 purchases return, 424, 425 purchasing process, 416–419

Q quick ratio, 236

R ratio analysis, 235 current, 236 debt to equity, 777 liquidity, 235–236 price-earnings, 667 profitability, 235 quick, 236 return on sales, 236 receipt, 133 receipts, cash and sales, 473 Index A

I01-I10_IN-A-868829.indd 8

Index

payroll taxes, employer’s FICA, 346–347 FUTA and SUTA, 347 journalizing, 347–348 posting to general ledger, 349 Payroll Tax Expense, 347–348 payroll tax expense forms, 351–354 payroll tax forms. See payroll tax reports payroll tax liabilities, 351–357, 365 payroll tax reports, 351, 357–358 percentage of net sales method, 712 periodic inventory system, 729 permanent accounts, 105 after closing, 262 perpetual inventory system, 728 personal interest tests, 10 personality, 9 petty cash disbursement, 647 petty cash envelope, 652 petty cash fund, 647 cash short and over in, 653–654 opening a, 647–648 replenishing a, 649, 652 petty cashier, 647 petty cash register, 650 petty cash requisition, 650 petty cash voucher, 648 physical inventory, 521 piece rate, 313 plant assets, 670, 671, 672. See also depreciation records of, 675 point-of-sale terminals (POS), 729 post-closing trial balance, 262, 597 postdated check, 289 posting, 164, 169–173 closing entries to general ledger, 260–261 a correcting entry, 180 employer’s payroll taxes to general ledger, 349 from work sheet, 534–536 general journal entries, 168–169 importance of, 170 payroll liabilities to general ledger, 356–357 payroll to general ledger, 343–344 sales journal to general ledger, 453 to accounts payable subsidiary ledger, 426 to accounts receivable subsidiary ledger, 389, 391 preferred stock, 615, 617 dividends, 621 premium, 429, A-5 prepaid expense, 525, A-31 price-earnings ratio, 667 principal, 752 proceeds, 759 processing bankcard sales, 394

I–8

9/19/05 5:54:50 PM

Index

I N D EX A reconciling the bank statement, 284-287, 297 reinstatement, of written-off account receivable, 700, 709 relevance, 555 reliability, 555 report form, 232, 566 restrictive endorsement, 281 retailer, 380 retained earnings, 554 closing entries, 591 statement of, 565–566 return on sales, 235 revenue, 60, 104 accrued, A-27 unearned, A-31 revenue accounts, 106–107 closing, 254–255 on an income statement, 221 rules of debit and credit, 79–80 revenue realization, 386, 557 revenue recognition, 113, 386, A-26 revenue section on income statement, 221, 558 reversing entry, A-32 routing checks, 291 rules of debit and credit, 79–80 applying, 83–87, 111–115 and equality, 115 for temporary capital accounts, 106–109 ruling, 199 special journals, 453 work sheet, 199, 530

S salary, 311, 324 and commission, 313 expense, 340 sales, account, 382 international, 382 internet, 468 sales allowances, 388 sales and cash receipts, 473 sales credit column posting to Sales, 454 sales discount, 394 sales journal, 450, 451, 453, 454 posting to ledger, 452, 453 posting totals of, 454–456 recording sales of merchandise on account, 451–452 sales of merchandise on account recording, 451–452 sales on account, 384 recording, 386–388

I–9

sales returns, 388 Sales Returns and Allowances account, 389 sales slips, 384 bankcard, 394 sales tax, 385 Sarbanes-Oxley Act, 783, 838, 841, 845 schedule of accounts payable, 499 schedule of accounts receivable, 466 Securities and Exchange Commission (SEC), 447, 597, 836 selling expenses, 561 service business, 29 contrasting with a merchandising business, 380 service change, bank, 286 shareholders, 31 shipping charge, 433 showing net income, 203 showing net loss, 206 signature card, 279 six-column work sheet. See also ten-column work sheet; work sheet account name section, 198 completing the, 205 heading for, 197 preparing the, 196–199, 206 showing net income, 203–205 showing net loss, 206 skills, 8, 11 slide error, 178 social security tax, 316. See also FICA sole proprietorship, 30, 31 accounting functions involved with a, 105–109 source documents, 133 applying information from, 134 bank statements as, 288, 289 cash register tapes as, 393, 643 credit memos as, 389 debit memos as, 424 examination of, 134 for cash payments journal, 489 sales slips as, 384 special endorsement, 281 special journals, 450. See also specific journals specific identification method, 731 spreadsheets, electronic, 67 state taxes, 318, 352–353 State Unemployment Tax Act (SUTA), 347, 354–355 statement of cash flows, 234, 555, 569–570, 626 statement of changes in owner’s equity, 220, 225–228 statement of changes in partners’ equity, 809 statement of retained earnings, 565–566 statement of stockholders’ equity, 624 stock capital, 552, 553, 615

Index A

I01-I10_IN-A-868829.indd 9

4/7/06 3:31:54 PM

INDE X A common, 615, 616, 617 dividends, 619–621 preferred, 615, 617 stockholders, 31, 614 stockholders’ equity, 552, 611, 615 statement of, 624–625 stop payment order, 289 stopping payment on a check, 289 straight-line depreciation, 672, 674 subsidiary ledgers, 385 errors in the, 468 preparing schedules for, 466, 499 summary of depreciation, 677 SUTA (State Unemployment Tax Act), 347, 354–355

T

U uncollectible accounts receivable, 698, 719 allowance method, 704–710 calculating, 704, 712–714 determining, 699 direct write-off method, 698–701 expense, 703 journalizing transactions involving, 698–701, 705–710 recording, 698 reinstating, 700, 709 writing off, 698–699 unearned revenue, A-31 unemployment taxes, 347

V values, personal, 8 verifying and collecting source documents, 133–134 vertical analysis, 563, 695 voiding a check, 282 voluntary compliance, A-36 voucher, 418 petty cash, 648–649 system, 418

W wage and tax statements Form W-2, 357, 358 Form W-3, 357, 358 wages, 312, 324 hourly, 312 overtime, 313 weighted average cost method, 734 wholesaler, 380 withdrawals, 62, 104 withdrawals account, 104, 108–109 closing to capital, 257–258 withholding allowance, 316 work sheet, 197 adjusted trial balance section of, 529–530, A-6–A-7 adjustment for uncollectible accounts, 707 six-column, 196–199, 201–206 ten-column, 524–527, 529–536, A-2–A-7 working capital, 235, 303

Z zero balance, 174

Index A

I01-I10_IN-A-868829.indd 10

Index

T accounts, 79, 83–84 tax reports payroll, 357–359 tax tables, 316 taxable income, A-38 taxes EFTPS, 351 employer’s payroll, 346–348 federal income, 315–318 FICA, 316, 346–347 sales, 385 social security, 316, 318 state and local, 318 unemployment, 347 tele-tax, A-40 temporary accounts, 104 closing entries for, 253–258 ten-column work sheet, 518, A-2. See also six–column work sheet; work sheet adjustments in, 519–522, 524–527, A-4–A-6 extending amounts, 531, A-7 journalizing adjustments of, 531, 534, A-7, A-10 trial balance section, 518–519, 529–531, A-2 term, of promissory note, 752 tickler file, 422 time calendar, 754 time card, 312 traits of entrepreneurs, 27, 28, 29, 30, 44 personal, 8, 9–10 Transmittal of Wage and Tax statements (form W-3), 357, 358 transposition error, 178 trial balance, 177, 518–519 errors in, 178–179 on work sheet, 198–199

preparing a computerized, 211 preparing a manual, 177–179, 518–519 preparing a post-closing, 262, 597

I–10

4/7/06 3:31:55 PM

I N D EX B dear fellow stockholders letter, 413 employee costs, 371 evaluating long-term debt, 777 evaluating partnership operating results, 825 evaluating stockholders’ equity, 637 evaluating working capital, 303 horizontal analysis, 725 identifying corporate goals, 447 interpreting sales, 479 inventory levels, 749 return on sales, 247 statement of cash flows, 581 vertical analysis, 695

Academics economics, 286, 754 history, 134, 597 language arts, 29, 203 mathematics, 492, 834 science, 644, 734 Adler Planetarium and Astronomy Museum. See Businesses

Real-World Applications and Connections

Advanced Micro Devices. See Businesses A Matter of Ethics becoming an entrepreneur, 44 borrowing from petty cash, 666 company property, 74 computer viruses, 274 confidentiality, 412 early write-off, 724 financial report or repair, 246 gossip in the workplace, 160 handling sales returns, 610 insufficient funds, 514 is the boss always right, 776 keeping promotional items, 748 meeting a deadline, 190 money shuffling, 370 out-of-date goods, 548 padding a résumé, 24 padding expense accounts, 216 partner loyalty, 804 payroll information, 336 pocketing differences, 302 reporting a mistake, 580 showing favoritism, 446 software piracy, 100 using another person’s idea, 824 using a toll-free number, 128 using insider information, 636 whom will they believe, 694 working conditions, 845 working for a competitor, 478 American Express Company. See Businesses Analyzing Financial Reports analyzing employee productivity, 337 analyzing partners’ equity, 805 calculating price-earnings ratio, 667 calculating return on owner’s equity, 275 calculating return on stockholders’ equity, 611 classifying the balance sheet–assets and liabilities, 549 corporate responsibility, 846 cost of sales, 515

I–11

Applebee’s International. See Businesses Aveda Corporation. See Businesses Businesses 99 Cents Only Stores, 550 Adler Planetarium and Astronomy Museum, 480 Advanced Micro Devices, 750 American Express Company, 194 Applebee’s International, 640 Aveda Corporation, 26 Google Inc., 130 HARPO Productions, Inc., 48 Hewlett-Packard, 612 The Institute of Internal Auditors, 830 Jamba Juice, 276 King & King, Architects, LLP, 806 Los Angeles Angels of Anaheim, 162 Moss Adams, LLP, 784 National Geographic society, 4 Panda Restaurant Group, 76 PETsMART, 586 Plantronics, 516 Radio Flyer, 248 REI, Inc., 726 Rush Trucking, 668 The Sharper, Image, 448 Southwest Airlines, 102 Suncoast Motion Picture Company, 414 Symantec Corporation, 308 Tapatío Hot Sauce Company, 218 Underground Station, 378 U.S. Government Accountability Office, 696 Verizon Wireless, 338 Careers accounting manager, 17 accounting professor, 89 analyst, 428 chief financial officer, 736

Index B

I11-I15_IN-B-868829.indd 11

9/19/05 5:54:13 PM

INDE X B controller, 623 county auditor, 176 director of finance, 503 director of shared services, 361 equity research associate, 117 partner, 230 recruiting manager, 293 U.S. operations controller, 685 vice president, finance, 37

Communicating Accounting collecting an outstanding account, 724 creating a handout, 216 creating a partnership agreement, 804 demonstrating the double-entry system, 100 describing corporations, 636 describing source documents, 161 evaluating direct deposit, 336

Computerized Accounting adjusting entries, 541 chart of accounts, 121 closing the accounting period, 267 closing the fiscal year, 603 customizing financial statements, 631 exploring electronic spreadsheets, 67 general journal entries, 153 introduction to computerized accounting systems, 93 inventory costing, 743 maintaining cash funds, 659 mastering purchases and cash payments, 507 mastering sales and cash receipts, 473 notes receivable and payable, 771 posting to the general ledger, 185 preparing financial statements, 241, 575 preparing the payroll, 329 reconciling the bank statement, 297 recording and paying payroll tax liabilities, 365 recording depreciation, 689 recording purchases and cash payments, 439 sales and cash receipts, 405 setting up the general ledger, 819 starting a new company, 799 trial balance, 211 writing off uncollectible accounts receivable, 719 Critical Thinking the accounting equation, 74

Index B

I11-I15_IN-B-868829.indd 12

Real-World Applications and Connections

Case Study career advice, 24 CPA firm audits, 845 entrepreneurship, 44 merchandising business books and more, 514 coffee shop, 636 department store, 610 formal wear, 724 gourmet food gifts, 580 health foods, 666 home building and supply, 748 movie theater, 478 photography studio, 694 restaurant/retail shop, 776 sportswear store, 446 training videos, 548 videos, 412 partnership building and design, 824 dentists, 804 payroll financial planning, 336 warehousing center, 370 service business accounting services, 190 advertising agency, 216 computer consulting, 274 entertainment, 302 exercise and fitness, 160 health and fitness, 74 landscaping, 100 video arcade, 246 web site design, 128

explaining a transaction, 478 explaining cause and effect, 274 explaining financial statements, 580 explaining results, 610 inventory systems, 748 making the case for daily deposits, 302 a plan for quality, 446 presenting the balance sheet, 246 presenting your case, 412, 824 process to increase the change fund, 666 promote your project, 776 promoting an idea, 129 promoting technology, 694 public speaking, 370 requesting information, 514 summarizing success, 44 teaching the posting process, 191 training new employees, 548 writing an article, 25 writing a tip sheet, 74 writing e-mail, 845

I–12

9/19/05 5:54:15 PM

Real-World Applications and Connections

I N D EX B accounting for a merchandising business, 412 adjustments and the ten-column work sheet, 548 career possibilities, 24 cash control, 302 cash funds, 666 completing the accounting cycle, 274, 610 double-entry accounting, 100 ethics, 845 financial statements, 246 financial statements for a corporation, 580 free enterprise, 44 general journal entries, 160 general ledger and the trial balance, 190 introduction to partnerships, 804 inventories, 748 notes payable and receivable, 776 partnerships, 824 payroll accounting, 336 payroll records and reports, 370 plant assets, 694 processing purchases, 446 publicly held corporation, 636 six-column work sheet, 216 special journals purchases and cash payments, 514 sales and cash receipts, 478 temporary and permanent accounts, 128 uncollectible accounts receivable, 724 Cultural Diversity business etiquette, 165 business practices, 80 communication, 349 holiday observances, 519 local dialogue, 9 mealtime, 713 misinterpreting gestures, 466 personal space, 812 proper names, 322 setting deadlines, 251 Economics. See Academics Exploring the Real World of Business accounts and the general ledger, 162 analyzing adjustments, 516 analyzing business transactions, 76 analyzing corporate financial statements, 550 analyzing corporate stock, 612 analyzing credit losses, 696 analyzing purchases, 414 analyzing revenue and expenses, 102 analyzing sales, 378 analyzing sales growth, 448

I–13

assuring responsible governance, 830 becoming an entrepreneur, 26 closing the books, 586 controlling cash, 276 depreciating assets, 668 evaluating notes, 750 evaluating partnership financial statements, 806 evaluating payroll costs, 338 investing capital, 48 looking at fiscal year-end activities, 248 looking at partnerships, 784 looking at the role of purchases, 480 moving into the work force, 308 preparing financial statements, 218 protecting cash, 640 recording financial information, 130 summarizing results, 194 thinking about a career, 4 tracking inventories, 726 Google Inc. See Businesses HARPO Productions, Inc. See Businesses History. See Academics Institute of Internal Auditors. See Businesses International Accounting accounting for inflation, 549 cash management, 303 cultural values of employees, 371 dating documents, 161 DESD, 846 English: the link language, 191 the euro, 247 exchange rates, 101 financial statement formats, 581 global e-business, 129 international accounting career, 25 international accounting standards, 45 international competitive advantage, 515 International Monetary Fund, 667 International Product Life Cycle, 413 inventory measurement, 749 joint ventures, 805 long-term international loans, 777 money around the world, 75 number conventions, 611 offshoring, 337 OPEC, 825 plant assets, 695 tariffs and duties, 479 time zones, 217 transaction risks, 725

Index B

I11-I15_IN-B-868829.indd 13

9/19/05 5:54:15 PM

INDE X B utilizing e-procurement, 447 World Federation of Exchanges, 637 World Trade Organization, 275 Jamba Juice. See Businesses King & King, Architects, LLP. See Businesses Language Arts. See Academics Los Angeles Angels of Anaheim. See Businesses

Mathematics. See Academics Math Hints calculating ratios, 235 combining math functions, 385 fractions, decimals, and percents, 793 multiply by tens, 615 percentage change, 568 rounding cents, 672 showing cents, 115 using algebra, 52 Moss Adams, LLP. See Businesses

Panda Restaurant Group. See Businesses PETsMART. See Businesses Plantronics. See Businesses Radio Flyer. See Businesses REI, Inc. See Businesses Rush Trucking. See Businesses Science. See Academics Sharper Image. See Businesses Skills Beyond Numbers acquiring and analyzing data, 129 acquiring and evaluating information, 25, 694 allocating resources, 413 allocating time and money, 777 applying technology, 75 communicating information, 725 creative thinking, 161 customer service, 303 decision to liquidate, 825 designing and improving systems, 479 individual responsibility, 45 integrity, 337, 667 interpreting and communicating information, 191 leadership, 549 maintaining and troubleshooting technologies, 611 monitoring and correcting performance of systems, 447 negotiating, 805 notes payable and receivable, 776 selecting equipment and tools, 515, 749 self-management, 371 sociability, 581 teaching others, 101 understanding organizational systems, 217 using computers to process information, 247 working in a team, 275, 637 working with diverse cultures, 846

Real-World Applications and Connections

Making It Personal applying for a loan, 447 credit check, 725 evaluating inventory, 749 examining your currency, 479 your bank statement, 303 your budget, 413 your business, 247 your career, 25 your checking account, 275 your credit card, 129 your earning power, 75, 101 your entrepreneurial traits, 805 your ethics, 846 your federal income tax, 515 your household supplies, 549 your investment choices, 637 your job application, 45 your nest egg, 581 your part-time job, 337 your payroll deductions, 371 your personal balances, 191 your personal finance records, 161 your savings, 217 your spending plan, 101 your spending records, 667 your stocks, 611 your understanding of accounting, 825 your vehicle, 695 your vehicle loan, 777

99 Cents Only Stores. See Businesses

Southwest Airlines. See Businesses Suncoast Motion Picture Company. See Businesses Symantec Corporation. See Businesses Tapatío Hot Sauce Company. See Businesses Underground Station. See Businesses

National Geographic Society. See Businesses

Index B

I11-I15_IN-B-868829.indd 14

I–14

9/19/05 5:54:16 PM

I N D EX B U.S. Government Accountability Office. See Businesses

Real-World Applications and Connections

Verizon Wireless. See Businesses WebQuest bank reconciliations, 303 be your own boss, 25 cyber-shopping, 377 introduction, 783 depreciation, 695 evolution of a business, 805 fallen giants, 846 financial statements in sports, 247 investing, 637 liquidation, 825 the magic of matching, 639 online business transactions, 549 risks and rewards, 3 safe and secure, 413, 479 tax obligations, 371 tracking and costing, 749 transactions in sports, 161 a whole new ball game, 47 write it off, 725 you’re the boss, 307 Working in the Real World analyzing financial statements, 613 assets, liabilities, and owner’s equity, 49 assets and depreciation, 669 business checking accounts, 277 business expenses and revenues, 103

I–15

business transactions, 77 careers, 5 closing entries for a merchandising business, 587 completing the accounting cycle, 249 employer’s payroll taxes, 339 entrepreneurs, 27 estimating and recording uncollectible amounts, 697 financial statements for a corporation, 551 financial statements for a sole proprietorship, 219 food preparation, 831 keeping track of inventory and determining its value, 727 notes payable, 751 partnership agreements, 785 payroll deductions, 309 posting journal entries, 163 preparing financial statements for a partnership, 807 recording business purchases, 481 recording business transactions in a general journal, 131 recording cash and credit sales, 449 recording purchases of merchandise, 415 records for cash funds, 641 sales, 379 teamwork in preparing the work sheet, 517 work sheets, 195

Index B

I11-I15_IN-B-868829.indd 15

9/19/05 5:54:16 PM